Japan

In today’s briefing:

Japan Tobacco High Conviction Call: No Price Hikes This Year, But Profits Poised to Soar
SoftBank Group (9984 JP); Arm IPO, Priced for Disappointment
JMDC (4483 JP): Omron’s Partial Tender Offer
Peptidream (4587 JP): Solid Revenue Growth Continued in 1H23; 2023 Guidance Remains Unchanged

Japan Tobacco High Conviction Call: No Price Hikes This Year, But Profits Poised to Soar

By Oshadhi Kumarasiri

Combustible tobacco is declining globally, but Japan Tobacco (2914 JP) is defying the odds by outperforming the industry significantly through capturing market share from competitors.
Also in Heated Tobacco, Japan Tobacco is slowly but steadily capturing market share from IQOS and other heated tobacco makers.
There will be no price hikes this year, but we think that there’s enough spillover from the price hikes in the past 3-4 years to maintain JT’s OP growth momentum.

SoftBank Group (9984 JP); Arm IPO, Priced for Disappointment

By Victor Galliano

SoftBank’s internal transaction acquiring the 25% Arm stake held by SVF1 valued Arm at USD64bn; the IPO valuation range is from USD48bn to USD52bn
This valuation range implies an Nvidia-like price to prospective 2024E sales multiple range of 22x-25x; the prospectus reveals risks with Arm China, and confirms its lacklustre revenue and earnings growth
Given SoftBank’s largely negative track record on the after-market performance of its investee companies IPOs and SPOs; we expect further downside to SoftBank’s share price

JMDC (4483 JP): Omron’s Partial Tender Offer

JMDC (4483 JP) announced a partial tender offer for Omron Corp (6645 JP), the largest shareholder. Omron aims to make JMDC a consolidated subsidiary.
The offer is for a minimum of 12.0m shares (18.52% ownership ratio) and a maximum of 15.0m shares (23.08%) at JPY5,700 per share, a 22.4% premium to the undisturbed price.
Irrevocables (Noritsu Koki (7744 JP)) represent a 13.63% ownership ratio. While the offer is light, it will likely succeed as the minimum acceptance condition requires a 7.1% minority acceptance rate.

Peptidream (4587 JP): Solid Revenue Growth Continued in 1H23; 2023 Guidance Remains Unchanged

By Tina Banerjee

Peptidream Inc (4587 JP) has reported strong result for H1 2023. Revenue jumped 88% YoY, and both the operating and net losses have narrowed compared with the year-ago period.
2023 guidance remains unchanged, with revenue of ¥30B (+12% YoY), core operating profit of ¥6.7B (-31% YoY), and net profit of ¥2.7B (-64% YoY).
In the mid-term (over the next 3–4 years), Peptidream aims for revenue of ~¥50B. The company has set a goal to reach revenue of ~¥100B by 2030.

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Sep 08

Daily Brief Japan: Canon Inc and more

In today’s briefing:

A Full-Fledged Change in Board Composition, Not Just “Matching Numbers,” Is Required

A Full-Fledged Change in Board Composition, Not Just “Matching Numbers,” Is Required

It’ll be practical to appoint a female director from outside company at coming AGM and replace them with women when the terms of 2 current male statutory auditors each expire.
With Canon’s current ratio of female managers at 3.6%, it will take time for the current female non-statutory executive officers to leapfrog a number of seniors to board positions.
Since Mr. Mitarai will be 95 years old in 2030, a full-fledged change in board composition is required, including the appointment of non-Japanese directors, rather than just “matching numbers.”

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Sep 07

Daily Brief Japan: Intage Holdings, Japan System Techniques Co and more

In today’s briefing:

NTT’s Partial Offer for Marketing Consultant Intage (4326) –
Intage Holdings (4326 JP): NTT’s Partial Tender Offer
1Q Follow-Up – Japan System Techniques (4323 JP)

NTT’s Partial Offer for Marketing Consultant Intage (4326) –

Today, NTT (Nippon Telegraph & Telephone) (9432 JP) announced a partial offer to buy a minimum of 40.0% and a maximum of 51.0% of Intage Holdings (4326 JP).
Six crossholders holding 20.98% between them have separately agreed to tender a total of 19.9%. That means a minimum 25.4% minority participation. With success, minimum pro-ration is 51.5%.
The dynamics of this deal and where synergies lie suggests people need to think really hard about where they underwrite future illiquid ownership.

Intage Holdings (4326 JP): NTT’s Partial Tender Offer

NTT (Nippon Telegraph & Telephone) (9432 JP) has announced a partial tender offer for Intage Holdings (4326 JP) to make it a consolidated subsidiary.
The offer is for a minimum of 15.4m shares (40.00% ownership ratio) and a maximum of 19.6m shares (51.00%) at JPY2,400 per share, a 26.4% premium to the undisturbed price.
Irrevocables represent a 19.90% ownership ratio. The minimum acceptance condition requires a 20% minority acceptance rate. The offer is attractive and represents an all-time high.

1Q Follow-Up – Japan System Techniques (4323 JP)

By Sessa Investment Research

Japan System Techniques announced its 1Q results for FY24/3 after the close of the market on August 10 (Thursday).
Key figures on a consolidated basis ; operating profit fell 53.3%, to ¥122 mn on a 10.2% rise in sales, to ¥5,640 mn.
Ordinary profit fell 53.6%, to ¥134 mn, and net income attributable to the parent company fell 72.4%, to ¥61.

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Sep 06

Daily Brief Japan: JFE Holdings, Komatsu Ltd, Tokyo Stock Exchange Tokyo Price Index Topix, Srg Takamiya and more

In today’s briefing:

JFE Holdings (5411) Stock+CB Offering
JFE Holdings Placement – Well Flagged, but Would Probably Need a Wider Correction
Komatsu (6301) | A Winning Bet on Onshoring and Electrification
Judicial Decisions Are Also Important to Clarify the Nature of the Diversity Issues
1Q Follow-Up – Takamiya (2445 JP)

JFE Holdings (5411) Stock+CB Offering

Today JFE Holdings (5411 JP) announced it would raise ~JPY 121bn in an equity offering of 55mm treasury shares and JPY 90bn in a Convertible Bond offering.
¥125bn will be spent on capex for expansion, ¥75bn for capex, investments, and R&D related to decarbonisation, as well as repayment of debt to 2028.
This is a heavier than a “normal” equity offering. And recent large-ish equity offerings seem to have more volatility in outcome (post-offer overhang, or squeeze) than previous years.

JFE Holdings Placement – Well Flagged, but Would Probably Need a Wider Correction

By Clarence Chu

JFE Holdings (5411 JP) is looking to raise around US$870m to fund its capacity expansion plans. Together with the offering, it will undertake a US$610m CB issuance.
The deal appears to be well flagged with the firm disclosing its JV and other related CapEx plans in its earlier earnings announcement.
Overall, the new shares would result in a 8.2% dilution and represent 12 days of three month ADV.

Komatsu (6301) | A Winning Bet on Onshoring and Electrification

By Mark Chadwick

We turned bullish on Komatsu a year ago and the stock has since returned over 50%.
Komatsu is trading at 10x EV/EBIT versus an historical average of 11x, with a target price of ¥5,100/share.
Komatsu represents a cheaper way to play the theme of onshoring and long-term mining demand from electrification.

Judicial Decisions Are Also Important to Clarify the Nature of the Diversity Issues

A survey result supports that the fact that women temporarily leave the workplace due to childbirth or childcare is detrimental to their careers.
Since there’re issues that require solutions not only for companies but for society, judicial decisions will encourage companies to make female employees subject to the same conditions as male employees.
While more companies may take this ruling as an opportunity to consider conventional HR practices, since cases of employees going to court are rare, some companies may not act immediately.

1Q Follow-Up – Takamiya (2445 JP)

By Sessa Investment Research

Takamiya announced its 1Q results for FY24/3 on August 4, after the close of trading.
Key figures on a consolidated basis were sales of ¥9,896 mn (+9.7% YoY), operating profit rose 125.5% YoY, to ¥409 mn, ordinary profit rose 41.0%YoY, to ¥615 mn, and quartery net profit rose 33.0%YoY, to ¥417 mn.
An overview by business segment is as follows

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Sep 05

Daily Brief Japan: Lasertec Corp, Mercari , ZOZO Inc, Integral Corporation, Shiseido Company, Seven & I Holdings, Medipal Holdings, SBI Sumishin Net Bank, Ohba Co Ltd and more

In today’s briefing:

September Nikkei 225 Review – Lasertec, Mercari, Nitori IN, Expected DELETEs Out (Matsui the Biggie)
Nikkei 225 Index Rebalance: Mercari, Lasertec, Nitori IN; Nippon Glass, Mitsui E&S, Matsui Sec OUT
March 2024 Nikkei 225 Rebal – Look for Zozo, Ryohin Keikaku, and Maybe a Socionext Split
Integral Corporation IPO: New Price Range Is Tempting
Integral Corporation Pre-IPO – Thoughts on Valuation
Japanese Cosmetics Ready to Blossom with Asian Visitors
Bargain Sale at Sogo Seibu as Seven & I Finally Capitulates
Medipal Holdings (7459 JP): Started FY24 On a Strong Note with Accelerated Revenue
SBI Sumishin Net Bank – Dramatic ROA Expansion, Steady & Strong, Profit & Loan Growth, ROE at 19%
4Q Follow-Up – Ohba (9765 JP)

September Nikkei 225 Review – Lasertec, Mercari, Nitori IN, Expected DELETEs Out (Matsui the Biggie)

Today, somewhat earlier than expected), the Nikkei Index Team announced the changes to the Nikkei 225.
Lasertec Corp (6920 JP), Mercari (4385 JP), and Nitori Holdings (9843 JP) are added. Nippon Sheet Glass (5202 JP), Mitsui E&S Holdings (7003 JP), and Matsui Securities (8628 JP) removed.
That triggers flows of about ¥480bn a side, and some big, big changes. The announcement helps understand new process better.

Nikkei 225 Index Rebalance: Mercari, Lasertec, Nitori IN; Nippon Glass, Mitsui E&S, Matsui Sec OUT

By Brian Freitas

Mercari (4385 JP), Lasertec (6920 JP) and Nitori (9843 JP) will replace Nippon Sheet Glass (5202 JP), Mitsui E&S (7003 JP) and Matsui Securities (8628 JP) in the Nikkei 225.
As expected, Nitori Holdings (9843 JP) will be added at half the planned PAF since the trading value is low compared to the expected index weight.
Passive trackers need to buy between 1-17 days of ADV on the adds while selling between 1.2-16.5 days of ADV on the deletes. There is a big funding trade too.

March 2024 Nikkei 225 Rebal – Look for Zozo, Ryohin Keikaku, and Maybe a Socionext Split

Now that the September 2023 Nikkei 225 Rebal is announced, we look at the March 2024 rebal and its possibilities.
Socionext (6526 JP) is the only automatic ADD, but it might not be. ZOZO Inc (3092 JP) and Ryohin Keikaku (7453 JP) would be sector balance ADDs.
Fast Retailing (9983 JP) could get capped if it outperforms Nikkei 225 by ~10%+ to 31Jan2024. And Nitori Holdings (9843 JP) will see an add of ~14 days of ADV.

Integral Corporation IPO: New Price Range Is Tempting

Integral Corporation (5842 JP) has set its IPO price at JPY2,300-2,400 per share, 18%-29% lower than the IPO reference price range of JPY2,800-3,400 per share.
We previously discussed the IPO in Integral Corporation IPO: The Bull Case, Integral Corporation IPO: The Bear Case and Integral Corporation IPO: Valuation Insights.
Our analysis suggests that the revised IPO price range is attractive compared to peer multiples. The re-rating of peers since the release of the prospectus also makes the offer tempting.

Integral Corporation Pre-IPO – Thoughts on Valuation

By Sumeet Singh

Integral Corporation (5842 JP) is looking to raise around US$123m in its Japan IPO.
Integral is a private equity management company advising funds that invest in both listed and unlisted companies in Japan, with a focus on mid-sized companies.
In our previous notes, we looked at the company’s past performance. In this note, we talk about valuation.

Japanese Cosmetics Ready to Blossom with Asian Visitors

By Oshadhi Kumarasiri

Despite expected increased demand from returning Asian tourists, Japanese cosmetics companies have been hesitant to revise their 2H 2023 inbound demand projections.
We are long Kose Corp (4922 JP), Shiseido Company (4911 JP), and Pola Orbis Holdings (4927 JP), as consensus estimates look extra cautious and reasonable and appealing FY+2 valuation multiples.
We view the risk of Chinese consumers boycotting Japanese cosmetics due to Fukushima wastewater release as relatively low.

Bargain Sale at Sogo Seibu as Seven & I Finally Capitulates

By Michael Causton

Seven & I has finally sold Sogo Seibu to Fortress Investments.
It will be pleased to have offloaded a loss-making format it never really understood but at a cost – it will write off more than ¥90 billion in loans.
Fortress will immediately sell the land under Seibu Ikebukuro and some other assets to Yodobashi with suggestions of major redevelopment of both Ikebukuro and Shibuya.

Medipal Holdings (7459 JP): Started FY24 On a Strong Note with Accelerated Revenue

By Tina Banerjee

Medipal Holdings (7459 JP) announced strong Q1FY24 result, with a 6% YoY revenue growth to ¥887B, driven by growth across all three business segments.
However, operating profit declined 8% YoY to ¥12B, mainly due to increase in SG&A expenses. Driven by an extraordinary income of ¥3.3B, net profit jumped 35% YoY to ¥11B.
The company has reaffirmed FY24 guidance, which calls for a 4.5% YoY revenue growth, flat operating profit, and a 9.3% YoY decline in net profit.

SBI Sumishin Net Bank – Dramatic ROA Expansion, Steady & Strong, Profit & Loan Growth, ROE at 19%

By Daniel Tabbush

This is not a typo: SBI Sumishin Net Bank saw loans up 21% YoY in 1Q24, operating in Japan
The bank has achieved cost scale, with acquisition cost per account a fraction of 2 yrs ago
Credit quality remains exceptional, amongst best in Japan, with 0.06% NPL ratio in 1Q24

4Q Follow-Up – Ohba (9765 JP)

By Sessa Investment Research

Since reporting its full-year results for FY23/5, OHBA shares have been rerated and its share price is up approximately 20% at the time of writing.
In its five-year medium-term management plan ending in FY28/5, the company has set ambitious earnings targets (sales CAGR of 5.0%, operating profit CAGR of 7.0%) and a policy committed to capital efficiency (ROE 12%, ROIC 12%).
In addition, the company has further strengthened its shareholder return policy (targeting a total return ratio of 60%), which has been one of the best among listed construction consulting companies, and this has likely driven the rerating to some extent.

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Sep 04

Daily Brief Japan: Seiko Pmc Corp, JSR Corp, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Carlyle Group Tender Offer for Seiko PMC (4963) At 89% Premium
Seiko PMC (4963 JP): Carlyle’s JPY1,070 Tender Offer
Weekly Deals Digest (03 Sep) – JSR, Seiko PMC, Eoflow, ENM, Doosan Robotics, ARM, Integral Corp
Since It Is Unclear Whether Director Nomination Process Is Working, Voting Becomes More Important

Carlyle Group Tender Offer for Seiko PMC (4963) At 89% Premium

Carlyle Group is buying Seiko Pmc Corp (4963 JP) from 54+% owner Dic Corp (4631 JP) and minorities in a Tender Offer with optical premium of 89%.
It looks good, takes advantage of tax code particularities, and the nature of the company disguises some value. Shareholder structure means this is basically a done deal before it starts.
With minimal foreign active investor ownership, and significant crossholder, ESOP, and director ownership, only a bit of retail actually needs to tender to make this successful.

Seiko PMC (4963 JP): Carlyle’s JPY1,070 Tender Offer

Seiko Pmc Corp (4963 JP) has recommended Carlyle Group / (CG US)’s tender offer of JPY1,070 per share, an 88.7% premium to the undisturbed price.
Dic Corp (4631 JP) will not tender but vote for the share consolidation at the EGM. Post consolidation, DIC will sell its 54.51% stake to Carlyle at JPY799 per share.
Achieving the minimum ownership ratio (12.16%) requires a 26.7% acceptance rate, which is doable as the offer is attractive. The tender offer runs from 4 September to 17 October.

Weekly Deals Digest (03 Sep) – JSR, Seiko PMC, Eoflow, ENM, Doosan Robotics, ARM, Integral Corp

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 – Doosan Robotics (454910 KS), ARM Holdings (1822695D US), Integral Corporation (5842 JP) and S.F. Holding (002352 CH) IPOs.
Event-Driven developments – JSR Corp (4185 JP), Seiko Pmc Corp (4963 JP), Eoflow (294090 KS), ENM Holdings (128 HK), Shougang Fushan Resources (639 HK), Costa Group Holdings (CGC AU).

Since It Is Unclear Whether Director Nomination Process Is Working, Voting Becomes More Important

While it’s commendable that increasing numbers of companies are publishing skill matrices, there is not enough verification that the skill items are useful in expanding the value of the company.
It is a prerequisite that the process of selecting skill items and the nominating committee that governs it are functioning and independent.
Even if a governance framework and tools such as the skills matrix are introduced, whether they actually function depends largely on the quality of management.

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Sep 03

Daily Brief Japan: Mitsubishi Motors, SBI Shinsei Bank and more

In today’s briefing:

JPX-Nikkei 400 Rebal 2024: End-Aug 2023
SBI Shinsei Bank (8303) EGM Done. TOPIX Removal on Weds, Last Day Is 27 Sep, Money Comes Next Year.

JPX-Nikkei 400 Rebal 2024: End-Aug 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-August 2023.

SBI Shinsei Bank (8303) EGM Done. TOPIX Removal on Weds, Last Day Is 27 Sep, Money Comes Next Year.

Today, the EGM to approve the share consolidation (resulting in minority squeezeout and delisting) took place.
It was a done deal. So now it is done.
All that remains is for the technically adept to do what they expect they need to do.

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Sep 02

Daily Brief Japan: US Treasury (10 Yr Generic), Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Further Declines in DXY, Sovereign Yields May Provide More Fuel for a Rally in Global Equities
Better than Zero? But Limitations of One Female Board Member to Influence Board Decision-Making

Further Declines in DXY, Sovereign Yields May Provide More Fuel for a Rally in Global Equities

By Joe Jasper

In our two previous Int’l Compass reports (Aug. 18 & 24) we discussed that we were buyers on the pullback to the major $93 support level on MSCI ACWI (ACWI-US).
$93 on ACWI is 1+ year base support and a level that coincides with the 10-month uptrend. We remain bullish as long as the ACWI-US is above $93.
$93 on ACWI-US is likely the low for this pullback as long as the 10-year Treasury yield and DXY can stay below respective resistance levels (4.3%-4.35% and $103.70-$105.70).

Better than Zero? But Limitations of One Female Board Member to Influence Board Decision-Making

It’s debatable whether to view the gradual increase in the percentage of female executives as a positive or a negative that it is so much lower than in other countries.
This issue should be considered from the shareholder’s perspective, and the ratio of female board members should be increased if it is considered positive for the company’s management.
While there are many things that companies should do to increase the ratio of female managers, there are also significant issues that society as a whole needs to address.

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Sep 01

Daily Brief Japan: Rakuten Bank , Daiwa House Reit Investment, Lixil Group, Sony Corp, Honda Motor Co Ltd (Adr) and more

In today’s briefing:

Rakuten Bank (5838) – 4 Months On, Volume Decay and RB’s Place Among Banks
Daiwa House REIT Placement – Sponsor Cutting Stake, Would Likely Need a Wider Correction
Lixil (5938 JP): Levered Business Facing Cyclical & Secular Headwinds & Continued Mkt Share Pressure
Sony Group Corporation: 3 Must-Know Drivers Responsible For Its Growth! – Financial Forecasts
Honda Motor Co Ltd: Unveiling the 5 Factors That Will Propel Honda’s Momentum in Coming Quarters! – Major Drivers

Rakuten Bank (5838) – 4 Months On, Volume Decay and RB’s Place Among Banks

Four months ago, Rakuten Bank (5838 JP) was IPOed too low, then the price went up. It would appear foreign active ownership is relatively high.
Rakuten Bank stands out with high ROE and earnings growth. Banks stand out because, well, they’re going up.
Given expected 5yr earnings growth, Rakuten Bank at current price is probably “wrong.” But it has much less “bankness” than most banks, so you have to think about it differently.

Daiwa House REIT Placement – Sponsor Cutting Stake, Would Likely Need a Wider Correction

By Clarence Chu

Daiwa House Industry (1925 JP) is looking to raise US$175m from trimming a portion of its stake in Daiwa House Reit Investment (8984 JP).
Given that a selldown in the REIT hadn’t been explicitly guided, we would thus argue that the deal here isn’t particularly well flagged.
Overall, the base deal would represent 4.09% of the REIT’s total outstanding shares, representing 20 days of three month ADV.

Lixil (5938 JP): Levered Business Facing Cyclical & Secular Headwinds & Continued Mkt Share Pressure

By Robert C Prather Jr

2/3 of sales face secular decline in housing demand/shrinking population and the other 1/3 facing weak housing environment due to rising rates
Competition from private label and weak trends and ratios exist
The valuation does not seem to reflect the risks highlighted

Sony Group Corporation: 3 Must-Know Drivers Responsible For Its Growth! – Financial Forecasts

By Baptista Research

Sony Group Corporation delivered an all-around beat in the previous quarter.
However, consolidated operating income fell because the Financial Services segment’s operating income fell.
Software sales for the quarter increased mostly due to the launching of the enticing third-party software and increased PS5 penetration.

Honda Motor Co Ltd: Unveiling the 5 Factors That Will Propel Honda’s Momentum in Coming Quarters! – Major Drivers

By Baptista Research

Honda Motor delivered a mixed result in the recent quarter, with revenues below market expectations, but surpassed the analyst consensus regarding earnings.
Unit sales for Power Products operations fell to 5.645 million units, mostly because of a fall in North America.
The supply conditions for semiconductors gradually improved throughout the quarter, which led to greater unit sales in the United States year over year.

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Aug 31

Daily Brief Japan: Ichigo Inc, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Ichigo (2337) Buyback – History and Shareholder Structure Give an Edge
Higher P/E Is Driver for This Stock Rally. Profit Growth Is Necessary for Further Stock Rally

Ichigo (2337) Buyback – History and Shareholder Structure Give an Edge

Today after the close, Ichigo Inc (2337 JP) announced a stock buyback to go through the next 6 months. It is ¥3bn, which is not huge, but not nothing.
It seems like a constant refrain, but shareholder structure matters.
Ichigo has a history of doing buybacks (10% of shares out are in treasury), and the historical patterns are interesting when comparing announced intention and actual result.

Higher P/E Is Driver for This Stock Rally. Profit Growth Is Necessary for Further Stock Rally