Japan

• The September 2023 Nikkei 225 Rebalance is tomorrow at the close. This will engender a lot of buying of three names, and a lot of selling of 3 names.  
• It will also engender a funding trade of nearly ¥460bn. 
• I am going to beat the dead horse and warn about certain issues with this rebalance.

• Seven Bank Ltd (8410 JP) is the 7-11 convenience store bank, which focuses on ATM fees more than loans, so its cash is JPY952bn vs loans JPY35bn at FY23.
• Loan growth in 1Q24 is 7% YoY, one of strongest in Japan and it is accelerating in recent periods, alongside 8-9% growth in ATM transactions, retail accounts
• Exceptionally strong ATM transactions abroad at 92.4m in 1Q24 vs 66.5m in 1Q23, including US, Indonesia and Philippines.

• @Cosme continues to carve out a significant share of the cosmetics market, with record sales last year. 
• @Cosme appeals to a wide cross section of the population but this is about to get even wider once it starts selling via Amazon, its biggest shareholder.
• While there is debate about whether Amazon will increase its stake, what is certain is that Amazon will help drive iStyle’s sales growth.

• The stock is down more than 50% from its high 3yrs ago. The founder is 79. The CEO is 75. Employees and former directors own another 10%.
• This is an exit vs an MBO. And the Target Side negotiating the exit were rolled by Bain. This is NOT an expensive purchase. Bain’s equity check is 2.3x EBIT.
• But it probably gets done anyway unless someone gets noisy. For that, they’d have to buy a 10-15% stake I expect. 

• Early last year there were articles suggesting that KKR would IPO Kokusai Electric at a valuation of about ¥700bn. 
• A year plus later the company is now set to IPO for something on the order of ¥436bn. 
• We are sure KKR is breathing a sigh of relief that they didn’t unload shares 60% higher and can now offer other investors some “value”.

• Last week on 20 Sep I published Toshiba Tender Offer Ends Today – Upcoming Index Selldown Schedule and Sunday, The Biggish Sep 2023 “Wednesday-Thursday Trade” With Added Monday/Friday Flavour. 
• They were based on an expectation the TSE would announce the initial selldown for Sep-end as they normally would. Unbeknownst to me, on 22 Sep they announced end-Oct.
• The initial TOPIX selldown is 30 Oct, not 28 Sep. This affects expected reverse funding today.

• 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-September 2023.

• System Information (3677 JP) has recommended Bain’s tender offer of JPY930 per share, a 21.9% premium to the undisturbed price (27 September).
• 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 50.69% ownership ratio.
• Irrevocables to accept the offer represent a 19.69% ownership ratio. The minimum acceptance condition (lower limit) requires a 37.0% minority acceptance rate. The tender offer is reasonable.

• Nihon M&A Center’s share price has dropped more than 50% YTD despite several news media outlets reporting that there has been a surge in M&A activity among Japanese companies.
• At the same time, the Japanese government also issued new guidelines to promote more M&A activities in the nation to boost competitiveness.
• The no. of M&A transactions for the company has continued to grow however, value per transaction has been on a declining trend suggesting these deals are smaller in size.

• Increase in the number of non-regular workers is a factor in gender wage disparity and has also put pressure on profit margin since labor was invested in low value-added jobs.
• In Japan, childcare is assumed to be dependent on the efforts of the family, and there is little thought of society solving childcare issues, and government policies reflect this idea.
• Problems also exist on the part of employers, with low rates of men taking childcare leave, and the top reason being an atmosphere that makes it difficult take childcare leave.

• On 31 August, I published Rakuten Bank (5838) – 4 Months On, Volume Decay and RB’s Place Among Banks. It’s up 40.6% since the day after I wrote, reasons unclear.  
• TOPIX Banks Index is up 10.4% since then, with post-BOJ meeting price movements indicating a kind of momiai.
• For Rakuten Bank, while growth means it may not be “expensive” it is no longer dirt cheap. And I cannot identify the culprit, so time to take profits. 

• YFO has returned with a potential tender offer price of JPY1,255 per share for Toyo Construction (1890 JP), 25.5% above its previous offer of JPY1,000 per share.
• The offer is conditional on due diligence access to confirm the feasibility of the medium-term management plan and no material accounting, tax, or legal issues.
• The due diligence will take a month, with the offer expected to commence in late December. Expect due diligence access as the revised offer represents a 10-year high. 

• Kokusai Electric (6525 JP) is a speciality manufacturer of semiconductor production equipment. KKR & (KKR US) seeks to raise about US$750 million through listing Kokusai.   
• Kokusai has the leading market share in the batch deposition equipment market and the second largest market share in the treatment equipment market, according to TechInsights and Gartner.
• The key elements of the bull case rest on a leading market share, strong IP, healthy forward revenue indicators, increasing recurring service revenue, solid gross margin trends and modest leverage.

• After more than doubling between early April and the end of August, Disco has dropped back. The outlook for demand and valuations suggest potential downside of 20%. 
• Operating profit was down 21% YoY in the June quarter on a 10% decline in sales. Management is guiding for 18% and 32% declines this quarter. 
• Over-Optimistic expectations regarding the pace and degree of cyclical recovery are being squeezed out of the share price. 

• Ryobi is a global manufacturer of high-quality aluminum die castings used for transmission cases, engine parts, and other vehicle parts
• Ryobi has recently gained market attention following an announcement that the company will produce large electric-vehicle body parts using “gigacasting”
• The stock is expected to benefit from EV adoption with improved earnings and increased market recognition

• Japanese inflation, which peaked at 4.3% in January 2023, gradually decreased to 3.5%, 3.2%, 3.3%, 3.3%, and 3.2% in the subsequent months of 2023.
• Inflation rates remained stable for most items, excluding Fuel, Electricity, Water, and fresh vegetables, indicating the persistence of cost-push inflation.
• In this insight, we analyze the recent quarterly performance of Yakult, Nissin, and Seven & I, Japanese Consumer Staples companies discussed in our prior Smartkarma Original.

• The question is whether companies can achieve results by increasing investment to secure and train human resources who can contribute to transitioning to a business that produces high value-added products.
• Regarding the disclosure of human capital, many issues remain, such as the lack of unified definition of the required items and the inability to use this data as comparable data.
• Percentage of women in managerial positions is more serious. The lack of on-the-job training for women is an on-going issue that makes the path to future managerial positions more difficult.

• KKR is looking to raise around US$750m via selling a stake in Kokusai Electric (6525 JP) (KE) in its Japan IPO.
• KE main business activities consist of the manufacturing, sales and maintenance service of semiconductor manufacturing equipment.
• In this note, we talk about the positive aspects of the deal.

• Niche Japanese Semiconductor Production Equipment specialist Kokusai Electric (6525 JP) last Thursday announced the TSE approved its late October IPO (with indicative pricing, shares to be sold, and initial prospectus).
• This insight looks at initial shareholder structure, selling group, post-IPO shareholder structure with index inclusion timing, and follow-on flow possibilities. 
• At ¥435bn indicative market cap, it will be the largest IPO in Japan since pre-covid, despite coming in a cycle trough. I expect it will be hot. 

• Last night Reuters teased a headline saying the Nintendo Family Office called YFO (and related entities) would raise its proposed takeover price for Toyo Construction to ¥1255/share.
• Recently, the company had agreed to start an investigation and YFO had dropped its demands for an EGM. In Q1, the company reporetd Revenues +18.6%yoy, reasonably in-line with original guidance.
• This new price comes at a 1% premium to previous close, and is meant to start discussions. The Board has indicated it will start deliberations tomorrow.

• Tsuruha is the latest retailer to come under attack from an activist investment fund. 
• As with Seven & I, the company fended off demands to shake up its board, crucially with the support of Aeon, its largest stakeholder.
• The move will likely lead to some careful reconsideration of how Tsuruha and Aeon could work together and may even lead to a Welcia/Tsuruha merger.

• KKR is looking to raise around US$750m via selling a stake in Kokusai Electric (6525 JP) (KE) in its Japan IPO.
• KE main business activities consist of the manufacturing, sales and maintenance service of semiconductor manufacturing equipment.
• In this note, we talk about the not-so-positive aspects of the deal.

• Every year it’s the same trade. This year it is Wednesday and Thursday. There are risks to the analysis – notably allocation.
• But there may be ¥800bn+ to buy on one day into the close later this month (+ another ¥200-300bn on two other days). Then a ¥500bn sell two days later.
• Over the past ten years, the two day return on the March trade is great. In Sep, not so much. This year there are Extra Special Flows.

• Recognizing the cost of capital and return on capital is an important factor in determining business strategy, but not many companies disclose their cost of capital and specific management vision.
• In order to increase the effectiveness of disclosure of the cost of capital, we should consider changing the Corporate Governance Code to require disclosure by prime market listed companies.
• JPX Prime 150 Index, which is based on “equity spreads,” has begun to be calculated, but it has’t attracted much attention since its performance doesn’t differ from that of TOPIX.

• 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 this week: Lansen Pharmaceutical Holdings Co, Ltd. (503 HK)‘s Scheme.
• Key updates took place for: Costa Group (CGC AU), Origin Energy (ORG AU), Healius (HLS AU), Symbio (SYM AU), Poly Culture (3636 HK), and Metro Pacific Investments (MPI PM).

• Major milestones with high expectations coming in the next 2-3 years: 1) Phase IIb US trials for H-1337 as “first choice as a second-line Glaucoma drug” for patients who do not respond to PGs, 2) 2023 application, 2024 approval and 2025 launch of DW-1002 in Japan, 2023 application/approval/launch in China, as well as expedited development of combination formula MembraneBlue-DualR (DW-1002 + trypan blue) in the US [NEW], 3) 2023 approval and subsequent 2024 launch of DW-5LBT lidocaine patch for treatment of neuropathic pain in the US, and 4) clinical trials in 2024 in Japan and application for approval in 2025 of regenerative cell medicine DWR-2206 [NEW].
• Coming into the 3Q, DWTI announced 2 updates not included in its “Business Plan and Growth Potential.”
• On 7/13, DWTI announced the development plan for regenerative cell medicine DWR-2206, aiming to submit a notification of clinical trial at the end of 2023, start clinical trials in 2024, and submit application for approval (NDA) in 2025 (using the expedited conditional and term-limited approval system for regenerative therapeutics).

• In Q1FY24, Paramount Bed Holdings Co Lt (7817 JP) reported 7% YoY revenue growth to ¥24B, due to solid performance in the medical care and the nursing care businesses.
• Due to higher SG&A expenses, operating profit grew just 2% YoY to ¥3.3B. Net profit rose 7% YoY to ¥2.9B, mainly due to 13% YoY increase in foreign exchange gains.
• Paramount has reiterated FY24 guidance, which calls for 6% YoY revenue growth, 4% YoY operating profit growth, and 6% YoY growth in net profit.

• Our overall outlook remains largely unchanged; we remain bullish on global equities as long as the MSCI ACWI (ACWI-US) is above major $93 support.
• We also discussed that if the 10-year Treasury yield remains below 4.35% and the DXY is below $105.70, we would continue to expect $93 support on ACWI-US to hold.
• The 10-year Treasury yield is attempting to break above 4.35% and this could create a problem for ACWI-US; we will continue to monitor closely.

• Activist investors’ proposals were consistently based on increasing shareholder returns. The change in the environment, in which ％ of foreign shareholders increased while cross-held shares decreased, had a major impact.
• Regarding the selection of directors, discussion on contents of Skill Matrix should be more active, as it’s suspected that top management is selecting candidates who are aligned with their wishes.
• The voting standards of domestic institutional investors are iridescent and still dependent on public opinion for each proposal. The change in public opinion has only just begun.

• Kokusai Electric (6525 JP)‘s listing has been approved by the JPX and the stock is expected to start trading on the Prime Market from 25 October.
• At the reported indicative IPO price of JPY 1890/share, Kokusai Electric (6525 JP) will be valued at JPY 435bn (US$2.94bn).
• The stock should be added to the TPX INDEX at the close on 29 November where trackers will need to buy over 14% of the stock issued in the IPO.

• Nippon Active Value Fund PLC (NAVF LN)’s jointly-held shareholding in Intage Holdings (4326 JP) has declined from 11.28% to 9.52% of outstanding shares (disclosed on 20 September).
• NAVF wants to take as much money off the table as possible as NTT (Nippon Telegraph & Telephone) (9432 JP)’s partial offer price represents an all-time high.
• Our revised minimum proration is 53.31%. NAVF’s action suggests that the minimum acceptance condition, which requires a 20% minority acceptance rate, should be satisfied.

We view Softbank Group (SBG) as “Low Risk” on the LARA scale. This is mainly due to the group’s low reported leverage, as measured by LTV. SBG has demonstrated its ability to manage LTV, by periodically monetising large holdings of liquid assets (e.g. Alibaba Group Holding or T-Mobile/Deutsche Telekom shares) via derivatives or non-recourse margin loans. Investors can derive comfort from SBG’s remaining holdings of those liquid assets on the balance sheet. Domestic telco Softbank Corp is the only significant cash generator consolidated into SBG. We see risks stemming from the group’s reliance on its Alibaba stake (which may be volatile), as well as the use of cash from the asset monetisation programme. We are also concerned about the large share repurchase programmes despite SBG’s weak results, as well as the company’s ability to invest.

Our Credit Bias is “Stable”. We believe the worst is over for SBG. The North American and Chinese tech sectors appear to be improving. SBG executed a major asset monetisation exercise in FY 2022-23 to shore up the balance sheet, raising it to a healthy level. LTV is very low, and liquidity is sound. We see little downside going forward, and more upside.

Controversies are “Immaterial”, but the ESG Impact on Credit is “Moderately Negative”. SBG has faced governance concerns, particularly over internal controls and the outsized influence of Chairman, CEO and founder Masayoshi Son. Such issues flare up on occasion, weighing on the credit. One concern is that the chairman could make imprudent investments, lowering the value of SBG’s holdings while driving leverage up.

• The JIP Tender Offer for Toshiba Corp (6502 JP) closes today. I expect that we will see results announced as early as late tonight, but by law, by latest tomorrow.
• There will be at least three major index downweights, and possibly deletions, most likely in the following five trading days.
• This shows the approximate maximum share and dollar amounts to be sold, and approximate dates. 

• In August, Itochu Corp (8001 JP) launched a Tender offer on Itochu Techno Solutions (4739 JP) to buy out minorities. 
• That tender offer ended last week, with Itochu and the acquirer vehicle owning 85+%. 
• Interestingly, there are near-term flow events as a result. Worth watching.

• Through all the upheavals in discretionary product distribution in the last decade, Itochu Corp (8001 JP)’s Itochu Textile subsidiary has managed to maintain huge power in the channel.
• While the trading firm has traditionally focused on premium fashion brands, in the last few years it has invested heavily in the sports market, including its growing investment in Descente.
• The move is part of wider plans to take lead share in sports, footwear and department store brands.

• Softbank’s successful Arm Holdings IPO is a relief for Masa, with Arm valued at USD57bn and Arm shares trading above the issue price; this supports the SoftBank share price
• Arm’s key challenge is delivering on the growth strategy to justify its super-premium valuation; Arm’s historic price to sales is at a big premium to its peer group, excluding Nvida
• On current market values including Arm, Softbank shares trade at a 52% NAV discount; however, Arm’s current valuation seems unsustainable to us, threatening to erode the near term NAV lift

• While Yamazaki Baking (2212 JP)‘s recent surge has been impressive, consensus expectations are high for the upcoming quarter, despite yet another price hike in July 2023.
• From a valuation perspective, we expect limited upside potential even if Yamazaki Baking surpasses consensus expectations.
• Therefore, we believe that the risk-reward profile for maintaining a long position in Yamazaki Baking is currently not particularly attractive.

• Despite the absence of special demand related to COVID-19, PHC Holdings (6523 JP)’s Q1FY24 revenue of ¥81.3B was at the same level as Q1FY23 due to favorable Fx impact.
• Operating profit declined 16% YoY to ¥1.7B, due to lower profit in the diabetes management business and a drop in the volume of PCR testing.
• PHC guided for FY24 revenue of ¥355.5B and operating profit of ¥29.3B (+47% YoY). The company expects FY24 net profit of ¥15.6B from a net loss of ¥3.2B in FY23.

• The percentage of female managers is low, around 10%, so it will take time for internal executive directors to be nominated, and meanwhile companies will be dependent on outside directors.
• Finally, TSE has clearly stated specific numerical targets, so the path to achieving the targets is clear. Now the focus will shift to the content of female board  directors.
• Hiring talented people should be the biggest management challenge, but the appointment of foreign talent has been too slow compared to the globalization of the business.

• Today, regenerative medicine service provider CellSource (4880 JP) announced a forecast revision lower for the year ending 31 October. It also announced a new dividend policy and dividend payout.
• It also announced an equity offering of up to 3.542mm shares, increasing float by 60% followed by a move from the TSE Growth segment to TSE Prime. 
• The dynamics of shareholder structure and flow mean one can wait this one out.

• SBI Sumishin Net Bank (7163 JP) raised around US$370m in its Japan IPO in Mar 2023. Its IPO linked lockup is set to expire on 24th Sep 2023.
• SBI Sumishin Net Bank is a Japanese digital bank set up as a 50-50 joint venture between Sumitomo Mitsui Trust Bank, Japan’s largest trust bank, and SBI Group.
• In this note, we will talk about the lock-up dynamics and updates since our last note.