Japan

• Tryt Inc (9164 JP) is looking to raise about US$460m in its Japan IPO.
• Tryt Inc (Tryt) offers employee placement services and temporary staffing services for the elderly care, nursing care and childcare workers segments.
• We have looked at the company’s past performance and track record against peers in our earlier notes. In this note, we will discuss our thoughts on valuation.

• The JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted (capped) market-value-weighted 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 be announced in early August 2023 based on trading data as of end-June 2023.

• Sosei Group (4565 JP) shares sold off heavily after a major setback in partner’s clinical trial. On June 26, Pfizer Inc (PFE US) decided to discontinue the development of lotiglipron (PF-07081532).
• PF-07081532 is one of three clinical candidates nominated by Pfizer during its multi-target drug discovery collaboration with Sosei to research and develop potential new medicines.
• As lotiglipron was the most advanced clinical candidate using Sosei’s drug discovery platform, the heavy sell-off seen in Sosei shares should not be considered as overreaction.

• YTD performance of 61% has been stellar and index beating but the concern remains whether there will be more left. 
• Keisei Electric Railway Co (9009 JP) April 23 ridership and revenue growth provide momentum despite the still non-existence arrival of Chinese tourists. 
• Chinese tourists’ arrival in 2H 23 may be slow but chances are that they will arrive in Japan and will boost both ridership and revenue.

• We remain bullish on Komatsu despite returning a positive 37% return over the past year. 
• Q1 results are likely to exceed expectations and guidance is likely to be cautious, due to forex, pricing and cost factors.
• Komatsu is still attractively valued compared to its peers and historical averages, and has 20% upside potential.

• We remain positive on Rakuten Bank, with its group ecosphere as a source of customer growth, its low cost base, and extremely low NPL ratio
• Rakuten Bank trades on the lowest PE multiple of the neobank peer group , with the low ROE to PBV ratio close to the best of its neobank peers
• Nubank shares have done well since we upgraded to a buy in January; we recommend investors to take profits given Nubank’s  limited potential for positive surprises and its stretched valuations

• In FY23, Daiichi Sankyo (4568 JP) recorded Enhertu product revenue growth of 218% YoY to ¥208B, 4% ahead of forecast, driven by indication expansion and strong market penetration in US.
• For FY24, Enhertu product revenue is expected to increase 54% YoY to ¥320B, driven by higher utilization in HER2 positive and HER2 low breast cancer in US.
• Daiichi Sankyo has two more drug candidates in late-stage trials for various cancers. Contribution of oncology to total revenue is expected to increase to 45% in FY26 from 20% now.

• The TSE is in a long-term battle to improve the quality of the prime market while maintaining lax listing standards that do not fit the prime market concept.
• If passive funds move to JPX Prime 150 Index, which would increase the divergence between stock prices of high quality and low quality companies, it might motivate the companies more.
• If there is little difference between performance of TOPIX and JPX Prime 150, the passive funds will be satisfied with this index, and the TOPIX engagement problem will be eliminated.

Initiating coverage

• A successful market disruptor – Japan Elevator Service (JES) has been executing its growth strategy, increasing market share in the domestic elevator maintenance market via organic and acquisitive growth.
• Operating in a market dominated by OEMs, it is making solid headway by 1) offering a cost-effective solution, 2) a differentiated service offering technical services and availability of parts on par with the OEMs, and 3) experiencing rapid growth through by establishing a nationwide network providing regionally rooted services.
• Pursuing growth opportunities – we highlight two drivers for the company; 1) secular growth as building owners convert to reputable independent providers for cost management, and 2) structural demand from aging elevators requiring modernization.

• NTT (Nippon Telegraph & Telephone) (9432 JP) is splitting its stock 25:1 on record date 30 June 2023. That means it goes ex- at the new price on 29 June.
• The day before, the stock is up nearly 5% on heavy volume. This is likely punters buying before it splits so one round lot will be <¥20,000 vs ~¥420,000 yesterday.
• But there is a new attraction for retail, somewhat un-noticed. 

• Tryt Inc (9164 JP) is looking to raise about US$460m in its Japan IPO.
• Tryt Inc (Tryt) offers employee placement services and temporary staffing services for the elderly care, nursing care and childcare workers segments.
• We have looked at the company’s past performance in our earlier notes, in this note we will undertake a peer comparison.

• Tryt Inc (9164 JP), a leading professional recruiting and temporary staffing service in Japan, seeks to raise US$450 million. Pricing is on 5 July, and book-building is 6-11 July. 
• In TRYT IPO: The Bull Case, we highlighted the key elements of the bull case. In this note, we outline the bear case.
• The key elements of the bear case rest on mid-tier revenue growth rates, margin pressure led by rising labour expenses, bottom-tier FCF margin and high leverage.

• While many listed companies have already established formal standards, TSE plans to establish rules with higher hurdles to ensure the independence of listed subsidiaries and other dependent companies.
• It would make more sense for TSE to question why the parent company maintains the subsidiary’s listing, and minority shareholders of both parent and subsidiary would be more interested.
• Certainly TSE’s “independence criteria” for independent directors is loose, which has negatively impacted the operation of the Board of Directors, so it would be effective to re-establish the criteria.

• Tryt Inc (9164 JP) is looking to raise about US$460m in its Japan IPO.
• Tryt Inc (Tryt) offers employee placement services and temporary staffing services for the elderly care, nursing care and childcare workers segments.
• In this note, we will talk about the not so positive aspects of the deal.

• Fast Retailing’s stock price is overvalued and faces downside risks from its Q3 results (maybe), China outlook (perhaps), and index rebalancing (most likely).
• Fast Retailing has enjoyed a premium over its global peers largely due to its higher exposure to China growth. Any wobbles here could be negative catalyst
• There is also a technical issue that will likely cap the weighting of Fast Retailing in the Nikkei 225 = index selling pressure

• M&A Research Institute (9552 JP)’s founder and CEO, Shunsaku Sagami, together with two other board members, aims to raise a total of US$127m through an accelerated international secondary offering.
• The deal is a small one to digest at only 3 days of three month ADV and about 8.5% of current mcap. 
• In this note, we will talk about the placement and run the deal through our ECM framework.

• Tryt Inc (9164 JP), a leading professional recruiting and temporary staffing service in Japan, seeks to raise US$450 million. Pricing is on 5 July, and book-building is 6-11 July.   
• In 2022, Tyrt was the leading provider of personnel dispatch and personnel introduction services in Japan’s welfare and nursing sector.
• The key elements of the bull case rest on large addressable markets, favourable market trends, strong pro-forma revenue growth, top quartile EBITDA margins and rising staff retention rates.

• The few positive disclosures suggest that there are few positive companies. The question is how much progress companies will make in efforts on gender gap disparity over the next year.
• To eliminate this gap, companies need to quickly realize that human resources are valued fairly as human capital, without gender distinction, and used as a resource for growth.
• Now that stock prices have become a key measure of management, pressure from investors influencing stock prices is more effective. Deep analysis of human capital disclosures is required of investors.

• Japan Investment Corp (JIC) has launched a Tender Offer on top photoresist maker JSR Corp (4185 JP), at ¥4,350/share.  
• That is a decent price, but it is not overwhelming. Furthermore, process for determining (and understanding) “fair” remains inadequate. 
• Significant foreign ownership, a high price, Japanese equity excitement, etc, all make this a situation where we likely see a pop (the last bit), a fade, then a re-drift better.

• JSR Corp (4185 JP) has recommended JIC’s pre-conditional tender offer of JPY4,350 per share, a 34.5% and 10.6% premium to the undisturbed price and last close, respectively.
• The pre-conditions relate to various country approvals. China’s approval should be challenging due to Japan’s recent curbs on Chinese exports of chipmaking equipment.
• The offer is long-dated and opens in late December. The offer price is attractive compared to peer multiples and just a touch below the all-time share price high.

• Tryt Inc (9164 JP) is looking to raise about US$460m in its Japan IPO.
• Tryt Inc (Tryt) offers employee placement services and temporary staffing services for the elderly care, nursing care and childcare workers segments.
• In this note, we will talk about the positive aspects of the deal.

• We believe that Masa’s AI predictions and ambitions in the AGM presentation may well need a reality check; nonetheless, Softbank subsidiary Arm is a beneficiary of increasing AI applications
• The prospective Arm IPO is a key driver in the recent Softbank group share price rally; we look at AMD’s acquisition of Xilinx for an indication of Arm’s potential valuation
• Softbank group’s stated NAV discount narrowed by 19 pp to 31%; we explore Arm IPO valuation scenarios for NAV upside but we only see Softbank upside in a super-premium valuation

• Medley (4480 JP) started 2023 on a strong note, with 1Q23 revenue increasing 56% YoY to ¥4.4B, mainly driven by 83% YoY revenue growth in medical platform business.
• Despite better-than-usual progress in Q1 result, Medley did not change 2023 guidance. However, the company sees a strong possibility of surpassing 2023 profit targets at the EBITDA level and below.
• Medley has revised its mid-term target and brough forward the timeline for achievement of the goals by one year. The company now aims to achieve revenue of ¥23B in 2024.

• Yamaha Motors had blow-out 1Q results. The 20% share price rally since then suggests much of the good news is in the price
• We are concerned that deteriorating macro-economic conditions in the US due to higher interest rates could derail demand for marine engines and boats
• The stock price of US peer, Brunswick has already started to correct. Yamaha now trades at a premium valuation

• FY23/3 full-year results were announced in the last month.
• In its consolidated earnings, Operating profit rose 33.9%, ¥2,253 mn, on a 5.3% rise in sales, to ¥41,894 mn. Ordinary profit was up 22.9%, to ¥2,400 mn, and net profit rose 51.3%, to ¥1,460mn.
• Compared to the company’s forecast at the time of the 3Q results announcement, net sales fell short by about 7%, but operating profit and net profit were in line. 

• Japan System Techniques announced itsfull-year results for FY23/3 after the close of the market on Friday, May 12.
• Operating profit rose 19.3%, to ¥2,385 mn, on a 9.9% rise in sales, to ¥23,519 mn.
• Ordinary profit rose 19.4%, to ¥2,450 mn, and net profit rose 33.2%, to ¥1,772 mn. 

• The Nikkei followed by other media outlets revealed Saturday that the JIC (株式会社産業革新投資機構) were in talks with JSR Corp (4185 JP) to acquire the photoresist maker for ¥1 trillion.
• JSR’s release (Japanese/English) noted that they are considering the matter, but no decision has been made. They note, however, a Board of Directors meeting on Monday 26 June 2023.
• Articles suggest a Tender Offer “this year”, delisting next. ¥1 trillion is a 50% premium. Or 35%. I expect shares go limit up, then we will get more news post-close.

• Eisai Co Ltd (4523 JP) is expected to receive full approval from the FDA for Alzheimer’s disease drug, Leqembi, as FDA advisory committee voted unanimously in support of the drug.  
• Leqembi application has been granted Priority Review, with PDUFA action date of July 6. Once the FDA grants traditional approval, broader Medicare coverage for Leqembi would begin the same day.
• Leqembi is expected to receive approval in Japan, EU, and China in FY24. With these approvals, Leqembi is expected to become the top selling Alzheimer’s disease drug globally.

• The “appointment of one female director at prime market company,” which 80% of companies have achieved, is an easy goal, but it’s impossible to ensure board diversity with one woman.
• There is concern that this “effort target without penalty” will give companies an escape route for not promoting board diversity, even with the lax target of 30% by 2030.
• Half of companies that set goals regarding female employees, but a few companies set goals regarding the %/number of board members and disclose “diversity” in skill-matrix for appointing board members.

• Nikkei reports that Japan Investment Corporation (JIC) is in talks to acquire JSR Corp (4185 JP) for around JPY1 trillion (US$7 billion) through a tender offer.
• JSR responded, “No decision has been made at this moment, although JSR is considering this matter.” The Board will discuss the proposal on Monday.
• Minorities will be supportive as the JPY1 trillion valuation implies a tender price of JPY4,850 per share, a 50% premium to the last close and an all-time share price high.   

• There were a couple of ad hoc rebalances in Korea last week for the Korea Stock Exchange KOSPI 200 (KOSPI2 INDEX EQUITY) and KOSDAQ 150 Index (KOSDQ150 INDEX EQUITY). 
• Coming Friday will mark the end of the review period for the next rebalance of the HSI, HSCEI, HSTECH, HSCI, LQ45, PCOMP as well as the SET50 June implementation.
• With Japan indices moving higher, the largest inflows went into ETFs tracking the Nikkei 225 (NKY INDEX) and other local/global indices.

• There are 44 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• No new deals were announced this week although the major shareholders of Amara Holdings (AMA SP) are in discussions with a third party
• Key updates took place for SBI Shinsei Bank (8303 JP), Yashili International Holdings (1230 HK), and Eoflow (294090 KS) 

• Over the last 5 years, share prices of major terrestrial TV broadcasters have substantially underperformed TOPIX, in large part due to the unprecedented, challenging environment as annual data by Dentsu showed total internet advertising expenditures exceeded total television media advertising expenditures in 2019 for the first time ever, and the annual MIC survey on average time spent using main media showed internet usage time exceeded TV real-time viewing in 2020.
• However, this underperformance trend has begun to change in 2023, as the stock market begins to discount the potential to commercialize the IP value of broadcaster content libraries.
• In February, USEN-NEXT HOLDINGS announced plans to acquire Premium PlatformJapan, Inc. (PPJ), the operator of “Paravi” subscription video distribution service.

• Since a few companies include ROE and ROIC as KPIs in their mid-term management plans and present compelling measures, now is the time to promote shareholder returns in short-term measures.
• Companies that expect stock price to rise should ensure that they make progress on the issues that overseas investors are focused on (improving profitability, corporate governance, capital allocation and disclosures).
• Companies with foreign ownership in 30% range are expected to work on issues of interest to overseas investors, while companies with low foreign ownership take indifferent response to shareholder proposals.

• The review period for the Nikkei 225 (NKY INDEX) September rebalance ends end July. We take another stab at identifying potential inclusions and exclusions.
• There will be a big impact on the potential index changes. Fast Retailing (9983 JP)‘s index weight could be capped and there will be a big funding trade. 
• There are many things to watch out for that could affect the impact on the inclusions, including stock splits among potential adds and stepwise inclusion of stocks in the index.

• Advantest’s stock has doubled in the past two months, outperforming even Nvidia, indicating a potential peak in momentum
• Near term technical indicators suggest the stock could be running out of steam, with few catalysts ahead of July Q1 earnings
• The stock is trading at a significant premium to Japanese-listed SPE peers and its historical EV/EBIT multiple of 15x

• Over the last 5 years, share prices of major terrestrial TV broadcasters have substantially underperformed TOPIX, in large part due to the unprecedented, challenging environment as annual data by Dentsu showed total internet advertising expenditures exceeded total television media advertising expenditures in 2019 for the first time ever, and the annual MIC survey on average time spent using main media showed internet usage time exceeded TV real-time viewing in 2020.
• However, this underperformance trend has begun to change in 2023, as the stock market begins to discount the potential to commercialize the IP value of broadcaster content libraries.
• In February, USEN-NEXT HOLDINGS announced plans to acquire Premium Platform Japan, Inc. (PPJ), the operator of “Paravi” subscription video distribution service.

• HS Holdings (8699 JP) remains an interesting hodgepodge of assets. It owns just under 50% of Mongolia’s biggest bank, recently IPOed  Khan Bank (KHAN MO). 
• It has a pile of cash. And it has a glorified pawn shop business in Japan. The bank shares must be sold, to a significant degree, by end of year. 
• Today it announced a buyback tomorrow of 6.4% of shares out. I expect it is one of two large individual holders. We’ll probably know more within a week.

• Japan Post Bank is no ordinary bank, without much loans, and mostly investments
• It is well-known for its US CLO exposure, but also moving more into private equity
• Many moving parts to the bank’s earnings, where we see downside risk on profit

• Mercari Inc (4385 JP) is potentially a leading candidate for inclusion in the Nikkei 225 in September. 
• There are other technical reasons to think it is not. 
• This insight looks at the issue of why it might be a leading candidate and why it might not be. 

• Nitori, Japan’s largest furniture retailer, once again grew consolidated revenues in its extended financial year to March.
• Despite the increased costs of imports, profits also rose, although net profits saw a rare decline.
• The group still has strong growth potential: it continues to diversify, including into apparel, expand its omnichannel operations and is now building more stores overseas. 

• There is concern about how well one female board director’s opinion will be respected in management discussions among the large number of male board members.
• Since the pool of female managers in companies hasn’t grown, Corporate Governance Code will remain an “effort target” rather than a specific numerical standard for the ratio of female executives.
• The government does not want to spark discussion of a “quota system” in the “political” field, so discussions of introducing a “quota system” for female board members are not realistic.