Japan

• The TSE and Government are pressuring low-PBR companies to DO SOMETHING to raise their PBR to >1.0x. The easiest way to do that is raise ROE.
• Raising R requires customers “agree” (buying more, paying a higher price, etc). Lowering E means buying back shares or paying big special dividends. That’s easier for a company.
• So buybacks have been increasing in number, and breadth, and to some degree in size. This insight describes the mechanics/details of how buybacks work in Japan.

• Last year, I wrote about Joyful Honda (3191 JP)‘s implementation of a ¥2.5bn ToSTNeT-3 into Accelerated Share Repurchase. It was the first such transaction I knew of in Japan.
• This year, they have just announced another for nearly twice the size. It is worth looking at the details and comparing the stock vs Peers.
• It is also worth understanding exactly what the incentives are for whom and how that impacts the path. And who might respond to it.

• Concerning Australian tax-loss selling baskets, the sell across the four baskets made 4.2% vs ASX200 in May, then is up.
• Be long Japan Post Bank (7182 JP). Or longJapan Post Holdings (6178 JP) for a long JPB position. Don’t be short JPB or short JPB vs JPH.
• As a PRC aviation/defense play, AviChina Industry & Technology H (2357 HK)‘s fundamentals are undemanding. 

Dentsu experienced difficult trading conditions in its first half, with US client hesitancy, poor Chinese macro conditions and a one-off hit from a problematic project in the DACH region, compounded by demanding comparatives. These ease in H223, and trading should also benefit from one-off events like the Rugby World Cup, as well as the contribution from Tag, consolidated from 1 July. FY23 guidance is now for organic net revenue growth of 0% to -2% (was 1–2%) and a 17.0% operating margin (was 17.5%). With the inclusion of Tag, operational cost savings and lower interest following debt restructuring, guidance for EPS is unchanged. We have updated our forecasts to reflect this, with a knock-on into FY24. The valuation remains well below peers and long-term average metrics.

• The relationship between % of female managers and P/B doesn’t appear to be as strong as the significant correlation found between % of female directors and the value creation indices
• Currently, companies in business categories where women have greater opportunities to play active roles (new business models) are appointing female employees to management positions, and such  companies have higher P/Bs.
• Since the gender wage gap is attributed to % of female managers, unless a company has significant opportunities for women to play active roles, the gender wage gap is large.

• [cue Tom Hardy gif saying “That’s Bait”]. But yes, this story has a backstory to the Japanese underworld, and while the original sin may have been minor, it’s everything.
• The firm was raided, the CEO resigned, a govt authority “recommended” Sanei get rid of Mr Koike’s influence, banks got antsy, employee morale dropped. Sanei needed a saviour.
• Koike-San asked Open House (3288 JP) to buy his shares. They agreed to take over the company. It’s basically a done deal with a possible twist.

• In January 2023, NAVF and Michael 1925 LLC – affiliates of Dalton Investments LLC – announced a hostile partial Tender Offer for T&K Toka Co Ltd (4636 JP). 
• It failed. They wanted to buy 21.72% at ¥1300 to get to 44% post-Tender. The Company objected. Dalton/etc didn’t get the shares. Shares fell afterward. 
• Today, Bain announced a deal to take over the company at ¥1,400/share. T&K TOKA has agreed. It may not be as easy as that. And there is a fulcrum investor.

• Advantest is highly geared to changes in sales, with average contribution margins of 36% and 51% at the gross and operating profit levels, respectively.
• This works on the downside as well as the upside, something that has perhaps not received sufficient attention as optimists imagine a repeat of the recent extraordinary up-cycle.
• The share price is down 19% from its July 18 high, but at the top of its 5-year P/E range even vs historical peak EPS.

• Japan online retail stock broker, better average daily volume and rising new accounts
• Monthly data shows strong July average daily volume after an exceptional June
• Granular data on monthly new accounts is strong, now  at +31% in July YoY

• T&K Toka Co Ltd (4636 JP) has recommended Bain’s pre-conditional tender offer of JPY1,400 per share, a 32.0% premium to the undisturbed price.
• The pre-conditions relate to China TOB treatment measures (T&K Toka sell downs its Hangzhou Toka Ink stake to hold less than 30%) and various country approvals (Japan and Serbia).
• The offer will open in early January 2024. The minimum acceptance condition requires a 39.2% minority acceptance rate (50.3% excluding Nippon Active), which is doable due to a reasonable offer.

• Rakuten Group (4755 JP) announced last month that its consolidated subsidiary, Rakuten Securities (RAKUSEC JP), has applied for a listing on the Tokyo Stock Exchange.
• In the last eight quarters, the Securities business has experienced more than 100% profit growth, thanks to linear revenue growth while costs remained relatively stable.
• The previous private market valuation of ¥400bn implies a PE ratio of 15.0x, assuming the company maintains its current 2Q23 profitability level.

• Sanei Architecture Planning (3228 JP) has recommended Open House (3288 JP)’s tender offer of JPY2,025 per share, an 18.0% premium to the undisturbed price (15 August).
• The transaction is required to facilitate the exit of Mr Koike, the largest shareholder, and satisfy Article 27 of the Tokyo Metropolitan Organized Crime Exclusion Ordinance.
• Irrevocables represent a 64.21% ownership ratio, and the lower limit requires a 6.9% minority acceptance rate. The offer is a reasonable solution to the current predicament. 

• Omron’s stock price has collapsed 20% after missing Q1 earnings estimates. 
• The recovery in demand has been pushed back – the company may cut its full year guidance at the interim stage
• On near-term earnings, the stock is around fair value. There is +20% upside for longer-term investors based on our DCF 

• TSE market capitalization of has doubled since 1990 and the number of companies has doubled, while TOPIX is 20% lower than its 1989 high. Money went mainly to IPOs.
• P/B, TSE’s expectation for stock price appreciation, had high correlation with TOPIX, 0.84 from 1999-2019. However, it correlated negatively for 4 years from 2020 with other factors having significant impact.
• Correlation between TOPIX and nominal GDP is 0.94 for 2020-2023, showing higher correlation. Expectations of higher nominal profits caused by transition from deflation to inflation are behind the stock rally.

• Thanks to strong demand from China, 1Q results at Tokyo Electron (TEL) were just bad, not horrible. Operating profit was down 30% YoY on a 17% decline in sales.
• 1H guidance implies that 2Q will also be weak. Full-year FY Mar-24 guidance implies an unlikely 50% sequential increase in net profit, putting the shares on 32x projected EPS.
• A return to peak EPS next fiscal year would drop the P/E ratio to 21x, which used to be the top of TEL’s P/E range. Sell. 

• Results show dramatically lower NIM, net interest income, but stock gains in spades
• The only way to analyze 7182 is to have a view on its stock, bonds, investment gains
• Unrealized gains more than doubled to JPY472bn: fire-power remains, but is it valuable?

• Kaken Pharmaceutical (4521 JP) reported muted operating performance for Q1FY24. Revenue was flat compared to year-ago quarter, while operating profit declined 19% YoY. Net profit decreased 14% YoY.
• The company has reiterated FY24 guidance of flat revenue and 5% YoY decline in operating profit. However, net profit is expected to increase 23% YoY in FY24 on low base.
• Kaken is not expected to see any immediate respite as the contribution from the new products will not compensate for the revenue loss from its top selling products.

• EV motors are out of the red, profits on appliance, commercial and industrial products are up, and the yen is much weaker than management’s forecast assumes.
• Despite economic uncertainty, achieving FY Mar-24 profit guidance should not be difficult. 
• Operating margin trends are generally positive and valuations not too high for longer-term investors. Buy into current pull-back.

• Japan Post Bank (7182 JP) was effectively re-IPOed in March when Japan Post Holdings (6178 JP) offered more than a BILLION shares against the 400mm shares then in float. 
• It was a huge offering. A huge increase in float. Lots of immediate liquidity. A PERFECT opportunity for the TSE to do an ad hoc FFW change. But they didn’t. 
• Then in June they lowered the FFW (on a technicality). That leaves a big upweight in October. In this insight we measure the opportunity.

• In March 2023, Japan Post Holdings (6178 JP) sold ¥1.1trln of shares in Japan Post Bank (7182 JP), lowering its stake considerably, raising float. There will be a TOPIX upweight. 
• In May, with earnings, they announced their intention to buy back ¥300bn of shares or up to 10% of shares out. Today, they announced the details. ¥300bn through March end.
• In a ¥300bn ToSTNeT-3 tomorrow, the govt will sell back ¥105.7bn. That leaves a residual worth examining. So we examine.

• Strong Q2 results with revenue +42% yoy versus +33% in Q1
• Gross margin expansion to 51.3% on improving AI algorithm performance
• Stock down around 20% over past couple of months, No change to bullish growth forecasts.

• In Q1FY24, Shionogi & Co (4507 JP) recorded 52% YoY revenue growth to ¥109B, reflecting a one-time payment received for the transfer of co-development and co-commercialization license for ADHD drugs.  
• Shionogi has reiterated FY24 guidance. The company expects FY24 revenue of ¥450B (up 6% YoY), operating profit of ¥150B (up 1% YoY), and net profit of ¥155B (down 16% YoY).
• Despite competition, Xocova captured a 60% market share of the treatment group patients in Japan. Over a six-month period since emergency approval, more than 70K patients have used Xocova.

• Companies enjoy the benefits of going public, as a larger market capitalization expands their financing and makes it easier to acquire other companies, without capital raising through equity issuance.
• In a market economy, cash returned to shareholders through share buybacks etc is rationally allocated by investing it in companies that need more funds or are worthy of investment.
• Companies should successfully communicate their strategies for expanding corporate value and how to use cash to do so. More such companies will lead to the expansion of Tokyo market.

• Freee reported 4QFY06/23 results today. Revenue increased 39.6% YoY to ¥5.4bn (vs consensus ¥5.32bn) while operating losses increased to ¥3.0bn from ¥724m in 4QFY06/2022 (vs consensus ¥2.5bn).
• Freee KK (4478 JP) ’s full-year revenues and operating losses were in line with the company’s guidance, and increased losses were due to investments related to growth and customer acquisition.
• The company’s medium-term plan expects revenues of more than ¥50.0bn by FY06/2027E and operating profits by FY06/2025E which seems attainable to us.

• Itochu owns 36.3% of building materials and engineering firm Daiken Corp (7905 JP). They have launched a tender with gimmicky Majority-of-Minority to buy the rest at ¥3,000/share, 4.7x FY2024e EBITDA. 
• That’s low-ish, but given securities holdings, inventory, and net receivables at 4+x EBITDA it’s probably too cheap, but it gets quite close to the minimum threshold just with cross-holders.
• This deal price doesn’t include synergies (according to the valuations and the SC) but a bump would need an agitator. Hope alone won’t get it.

• 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 – Rakuten Securities (RAKUSEC JP), EbixCash (EBIXC IN), Lalatech Holdings Co Ltd (LALA HK) and Lianlian DigiTech (2104619D CH) IPOs.
• Event-Driven developments – Eoflow (294090 KS), Kyoden Co Ltd (6881 JP), Toshiba Corp (6502 JP), Metro Pacific Investments Co (MPI PM), Estia Health (EHE AU), Origin Energy (ORG AU). 

• Daiken Corp (7905 JP) has recommended Itochu Corp (8001 JP)’s tender offer of JPY3,000 per share, a 28.8% premium to the undisturbed price (10 August).
• 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 31.83% ownership ratio.
• The minimum acceptance condition (lower limit) requires a 50.0% minority acceptance rate (majority of minority condition). The tender offer is light vs historical multiples but represents a 5-year high price.

• The Nikkei 225 index closed up last week and it has a good probability to rise further this week: the MRM tool has identified the current pattern as “bullish”.
• Resistance targets are located past 33500, the index could reach that target this week.
• If the index rises for 3 weeks or more, it could breakout from the previous resistance range around 33700, and reach targets past 34000.

• This is a quick profile of one of the many Japanese stocks that have caught my interest and are in my cheap Japanese basket.
• I’ll be doing more frequent short write ups on names in this basket over the coming months.
• Sapporo Clinical Laboratory is a $24m market cap operator of retail pharmacies and clinical testing facilities across Hokkaido, Japan. 

• The data for the Nikkei 225 Rebalance is cemented as of 31 July 2023. Lasertec Corp (6920 JP) looks like a shoo-in. The DELETEs are obvious too.
• Fast Retailing (9983 JP) doesn’t get a cap (yet). But the other ADDs are a real question. It is a matter of interpreting the methodology and qualitative aspects. And FLOAT.
• One way, Socionext (6526) and Mercari (4385) are ADDs. Another way, it looks like Nitori Holdings (9843) and ZOZO Inc (3092) or Ryohin Keikaku (7453). FLOAT IS A PROBLEM ANYWAY.

• The JIP TOB for Toshiba (6502 JP) is here. Finally. It’s still too low. Since the announcement, when it was too low, peers are up a lot, and memory looks healthier.
• Hongkong Land (HKL SP) selling Three Exchange Square sounds purely speculative. At best. But it would have a bigly impact on Hong Kong Office sentiment if true. 
• Inpex (1605 JP) reported 1H results, a change in forecasts, and a bigly buyback. The mechanics are the same. The impact is a bit different, but it’s worth looking at.

• Modest profit growth and slow ROE growth are expected this year, and sustained TOPIX appreciation in the future will depend on increases in ROE and ROE+DOE.
• Lower OP Margin is the reason for the lack of ROE growth in FY3/2023. OP Margin and ROE are expected to have difficulty rebounding from this year’s profit forecast.
• Looking at the results of DOE, Total Dividends Paid and Dividend Payout for FY3/2023, which have not improved, there is still a lot of room for shareholder returns.

• Rakuten Bank is a clear beneficiary of the steepening yield curve in Japan, with its low LDR and healthy capital ratio
• Rakuten Bank’s LTM PE multiple of 11.4x, LTM PBV ratio of 1.5x and ROE of 13.8% makes it the best ROE to PBV ratio bank among its digital peers
• Rakuten Bank is also the lowest cost to serve Japanese digital bank; it is narrowing the PBV ratio discount gap with SBI Sumishin

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. Country Garden Holdings Co
2. Longfor Properties
3. Sino-Ocean Group
4. China SCE
5. Sunny Optical Technology Group

and more…

• For a change of pace, this insight briefly canvasses a clutch of Holdco’s trading at extreme levels. 
• Preceding the chart-heavy insight are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• The moment of truth is here, the Chinese are finally coming back to Japan. 
• Keisei Electric Railway Co (9009 JP) is one of the biggest beneficiaries of increased tourist arrivals in Japan. 
• It is trading at 0.04 PEG, a very low valuation considering its potential for producing large growth rate. 

• Beenos revealed a ¥300m buyback plan in 2QFY23 and recently declared a ¥500m buyback in 3QFY23. This incremental buybacks is likely to continue due to disposal of incubator investments.
• The cash balance of 34% of total assets and over 49% of market cap, supports the ongoing buyback trend even if incubator divestments take longer than expected.
• Hence, we expect Beenos Inc (3328 JP)’s Holdco discount to move closer to the 20% mark, potentially resulting in a 75% upside in the short term.

• SMFG achieved less of its FY24 profit forecast than peer megabanks; less upgrades
• SMFG reported a far lower ROE than peer megabanks & some worse financial metrics
• SMFG’s JPY bonds are only 0.88x of total equity; it is less leveraged than peer megabanks

• The number of companies that announced their intention to move to Standard Market has increased to 48, while most of 268 transitional companies are expected to move to Standard Market.
• Companies that cannot meet Prime Market listing criteria in 2026 can also move to Standard Market by undergoing examination, so they don’t need to announce their move in a hurry.
• Prime Market has slimmed down from TSE 1st Section by 600 companies, but it will remain market where many companies with market capitalization of about 50 billion yen are listed. 

• Recruit Holdings (6098 JP) reported 1QFY03/2024 results yesterday. Revenue and OP increased 0.9% and 1.9% YoY to ¥850.8bn (vs consensus ¥818.7bn) and ¥121.6bn (vs consensus ¥109.9bn) respectively.
• 1QFY03/24 revenues of ¥850.8bn and adjusted EBITDA of ¥165.9bn were higher than the company guided revenues and adj. EBITDA of ¥800-830bn and ¥140-160bn respectively.
• HR Tech segment’s revenues declined 9.1% and Recruit has shifted to a new pricing model for HR Tech which we think would further impact the segment’s earnings.

• Focus maintained on growth, experiencing temporary headwinds – Q1 FY3/2024 results showcased the company’s strong execution in driving growth, with sales increasing by 6.2% YoY.
• Although there was a major improvement in profitability in the Environmental Energy segment, the core Semiconductor and Electronics Components experienced a negative of persistent demand weakness in China.
• There was also reduced spot demand, negative FX translation impact YoY and on inventory valuation, and allowance for doubtful debt related to a key customer.