Japan

• We continue to recommend a tactical overweight to defensives (Staples, Health Care, and Utilities) as the MSCI ACWI (ACWI-US) tests the top-end of our anticipated 2023 trading range at $93.
• We also remain overweight Europe, Japan, and India, where a lot more than just defensives continue to outperform.
• Actionable Themes: Consumer Discretionary and Defensives, Mainly in Japan and Europe

• Examining ROE contribution requires first reducing cash and raising Asset Turnover and Financial Leverage. Also, regarding stock price appreciation, increasing ROE+DOE, which has higher correlation with TOPIX, will be effective.
• Stock performance is correlated with higher foreign ownership and Tobin’s q, indicating that overseas investors are also more interested in cash-rich, growth policy, dividend policy, policy-shareholdings, treasury-share retirements, AGM/IR disclosures.
• TSE’s adoption of P/B, made it easier to compare management capabilities with that of other companies. Managers who can’t achieve sufficient stock performance will have to seek help from shareholder-returns.

• Sony Corp (6758 JP) reported earnings on 28 April, which saw profit-taking the next day after a brief two-day run-up, as revenues, OP, and NP were guided down.
• There previous ¥200bn buyback ended about two weeks later. Yesterday they launched a new ¥200bn buyback, and the stock reacted well this AM. And then BIG new news this morning.
• Sony announced an assessment of a partial spin-off of Sony Financial. Assessment this FY, spinoff “within next 2-3yrs” (if possible). This garnered more excitement. Brief analysis of both follows.

• Suruga Bank Ltd (8358 JP) today signed an MOU (with board resolution) to form a business and capital alliance with Credit Saison (8253 JP). 
• Suruga will sell (post-dilution) 15+% of voting rights to Credit Saison, and buy 4.44% of CreditSaison. Then Suruga will try to buy back the shares it sold to Credit Saison.
• A look at the history is instructive, as is a look at the shareholder structure and the change in business model post-2019. Not as easy as it looks. 

• Medipal Holdings (7459 JP) announced strong FY23 result, with year-over-year improvement in sales and profit. While sales were just 1% ahead of forecast, net profit exceeded the guidance by 16%.
• Outperformance was mainly driven by PALTAC business. Revenue from PALTAC increased 6% YoY to ¥1,104B, 2% ahead of forecast of ¥1,080B, fueled by 14% growth in OTC pharmaceutical products.
• Medipal has guided for accelerated revenue growth of 3% YoY for its pharmaceutical wholesale business in FY24. In FY23, the business recorded revenue growth of 0.6% YoY.

Dentsu Group had demanding Q123 on Q122 comparisons and, with the acquisition contributions, we are not too concerned about the read-across for the rest of FY23, with performance skewed to H2. Progress in Customer Transformation and Technology (CT&T), up 6.7% in Q123 and now 35% of group net revenue, should buoy medium-term growth. Tag, the acquisition announced in March and expected to complete in early Q323 (subject to regulatory clearances), is another step towards the 50% CT&T target. We anticipate a return to margin expansion in FY24 as one-off factors retreat, the transition progresses and cost benefits from the ‘One dentsu’ initiative start to flow. The valuation remains at a marked discount to global peers.

• Canon has conducted 18 buybacks in the last 15 years. Every single one has been the same size. And the parameter-setting and how they are executed is… particular.
• For those with Canon to execute, using the information about patterns may be helpful. 
• For those interested in a trade, there may be one here.

• Zozo managed a 7% gain in GTVs last year which meant it grew its share of the fashion market. 
• It now has more than 10 million active users and has laid down plans to reach ¥800 billion in GTVs in the medium term.
• Zozo’s momentum is clear and its targets look realistic. Shame about the performance of Z Holdings.

• freee (4478 JP) reported 3QFY06/2023 results. Revenue increased 39.5% YoY to ¥5.1bn (vs consensus ¥4.9bn) while adj. operating losses increased to ¥1.9bn (vs consensus ¥1.9bn) from ¥676m in 3QFY03/2022.
• Widened operating losses is no big surprise as freee had already guided for increased investments related to invoicing system and tax filing season which has helped increase paying user numbers.
• As we continue to emphasise, freee’s business model is superior to that of MF who has resorted to several mediocre businesses (non-BA SAAS) to pursue aggressive top line growth.

• In 1Q23, Peptidream Inc (4587 JP) recorded revenue of ¥4,963 million, compared to ¥419 million revenue in year-ago period, driven by radiopharmaceutical business segment, which contributed 80% of total revenue.
• As of March 31, 2023, the company’s pipeline consisted of 127 discovery and development programs (representing a net increase of 1 program from the end of the prior financial year).
• Peptidream reiterated guidance for full-year 2024. Revenue is expected to increase 12% to ¥30B in 2024, while operating and net profits are expected to decline 30% and 64%, respectively.    

• The increase in the number of companies adopting restricted stock is a positive development, but the bias toward fixed remuneration and the non-disclosure of individual director compensation are unsolved issues.
• It’s ironic that 90% investors see ROE as equal to or lower than the cost of capital, while 93% companies know their cost of capital but only 2.3% disclose it.
• If affiliated companies with 20% shareholdings are included, there are still large number of companies covered (36.7% in the prime market), and “parent-subsidiary listings” continue to be a hot topic.

• Yesterday (15 May 2023) just before EOD, an article ran suggesting a ¥300bn capital raise by Rakuten (4755 JP). The stock fell 10% in 10mins. Rakuten hemmed/hawed but didn’t deny.
• One day later, we have a deal. It is up to 546mm shares including greenshoe, which at the close was ¥333bn. 468mm shares to the public, 79mm to 3rd parties.
• This increases Real World Float by 95%. In that respect this is vaguely IPO-ish. Investors have to re-underwrite. Then Passive re-shrinks the float. Details matter.

• Rakuten (4755 JP) aims to raise up to US$2.4bn (JPY323bn) via a global offering.
• The deal was undoubtedly accelerated by Reuters breaking the news of a possible equity raising on 15th May 2023.
• We have covered most aspects of the deal in our previous note, in this note we talk about the deal dynamics and run the deal through our ECM framework.

• Rakuten (4755 JP) is looking to raise around US$2.4bn by selling shares via a Japanese Public Offering and an International Offering as well as through a third-party allotment.
• The stock has already dropped 13.7% in the last couple of days on large volumes as the rumours of the offering started to swirl.
• The offering prices late next week and passive trackers will be buying stock once the stock settles and this will provide support in the near-term.

• Rakuten (4755 JP) announced a public offering of 468.1m new shares and third-party allotment of 78.8m shares to secure ¥333bn.
• Enhanced network coverage via KDDI network sharing to attract new users and overcome previous barriers for Rakuten Mobile.
• Mobile breakeven could drive Rakuten’s operating profit to ¥150-200bn, potentially boosting the share price to around ¥2,000.

• On 15th May 2023, large-cap logistics JREIT GLP J-REIT (3281 JP) (“GLP”) announced a follow-on equity offering to fund part of their recently-announced property acquisition. 
• The primary offer quantity is 209,991 units. In addition, there will also be an over-allotment quantity of 3,200 units. The total size of this offering could be roughly ¥30.6bn (~US$225mn). 
• In this insight, we take a closer look at the details of this offering and the potential of this offering to trigger strong secondary market performance in the following weeks.

• It has taken three years to build and set up but Aeon will finally open its first automated warehouse for online food sales in Chiba this summer. 
• The warehouse will run on technology from Ocado and act as the backend for a completely new online supermarket called Green Beans.
• A second warehouse is due to come online in 2026, expanding sales to all of Tokyo and into Kanagawa. This is the most advanced food e-commerce operation in Japan.

• Rakuten (4755 JP) is considering raising around US$2.2bn (JPY300bn), as per Reuters reports. The company hasn’t confirmed or denied the same in its press release.
• The company has been listing some of its subsidiaries and monetising investments to raise cash and has recently hinted at a possible equity issuance.
• While there is no guarantee that the deal will ever materialize, in this note, we take an early look at the possible deal dynamics.

• Born of a merger between two not-very-well-known businesses 20 years ago, Alfresa Holdings (2784 JP) is still not very well known. It is in a boring, low-margin business. 
• The highest EBIT margin in the past two decades was…. 1.8%. ROE was in the 8-10% range for 2016-2020 but has since fallen below, as PBR has fallen below 1.0x.
• Today, we got an amended Mid-Term Management Plan, a new dividend policy, and buyback of 10% of shares out based on last price. It’s worth looking in the details.

• GLP J-REIT (3281 JP) is looking to raise around US$220m through a primary follow-on offering. The deal is a large one to digest, at 17 days of three month ADV.
• The proceeds will be used to acquire three new properties and obtain a 30% co-ownership interest in a fourth one. 
• In this note, we’ll run the deal through our ECM framework and comment on deal dynamics.

• Appier achieved 32% revenue growth and 50.1% gross margin in Q1 FY23, exceeding company expectations
• We expect the pace of growth to accelerate, driven by stronger momentum in Digital Content in Q2 and Q3
• We remain bullish following the recent pullback in the share price. Stock is attractive at 5x EV/Rev

• Recruit Holdings (6098 JP) reported FQ4 and full-year FY03/2023 results. FQ4 revenue increased 9.0% YoY to ¥827.7bn (vs consensus ¥846.7bn) while OP decreased 57.1% YoY to ¥19.4bn (vs consensus ¥40.0bn).
• Excluding restructuring charges and one-time charge on impairment losses on right-of-use assets, OP increased 12.4% YoY to ¥50.9bn resulting in an OPM of 6.1% vs 6.0% in 4QFY03/2023.
• Recruit’s FY03/2024E guidance is in line with our expectation where the company expects earnings to weaken as labour markets have begun to slowdown.

• Revisions to the Corporate Governance Code have increased the ratio of independent directors, and more companies have established voluntary nominating and compensation committees.
• On the other hand, the transition to a Company with US type 3 committees and an independent director chairing the board of directors has been slow in coming.
• Substantive improvements regarding the transition to a company with an audit committee and the establishment of a voluntary nominating and compensation committee should be carefully examined.

• After the large tender offer in late 2021, SBI was always going to try to take Shinsei Bank private. Now they have launched their deal at ¥2,800/share. 
• That is below fair according to the Board, Special Committee, and implicitly to SBI. But the Shinsei Board has recommended shareholders tender so The Government will vote to squeeze out. 
• I expect some upset, the possibility of some activism, but it all plays out in the back end in my opinion. Not the front end.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads  111 Inc (YI US), ARTERIA Networks Corp (4423 JP), Estia Health (EHE AU), United Malt Group Ltd (UMG AU), Aag Energy Holdings (2686 HK), Hailan Holdings (2278 HK).
• Lowest spreads – Healius (HLS AU),Liontown Resources (LTR AU), Penguin International (PBS SP), Lian Beng (LBG SP), Mincor Resources NL (MCR AU), Blackmores Ltd (BKL AU), Arcland Service.

• 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 – Nexus Select Trust (NST IN), Tata Technologies (TATATECH IN), ADICON Holdings Limited (ADI HK), Horizon Construction Development (1887128D HK) IPOs.
• Event-Driven developments – ARTERIA Networks Corp (4423 JP), SBI Shinsei Bank (8303 JP), Toshiba Corp (6502 JP), Hailan Holdings (2278 HK), Inner Mongolia Yitai Coal Company Ltd (3948 HK), Allkem. 

• The 100 Yen shop model looked in danger when inflation began to bite and labour costs surged but the sector continues to expand
• Their fixed price model meant there was little leeway to offset higher costs through higher prices but a survey shows 90% of respondents visited a Daiso store recently.
• While Daiso has adapted quickly and looks to have a bright future, Seria Co Ltd (2782 JP) refuses to adapt and has seen profits plummet.

• This past week, nearly 150 companies in Japan announced buyback programmes totalling ¥2.1trln. 3 Tenders, 26 ToSTNeT-3 buybacks (including at least 5 delayed starts). 
• The median on-market buyback was 2.40% of shares, the average 2.9% (both measured as practical maxima at announcement. Median/Average % of ADV was 7.6/9.2%. 
• My prediction that this will be a record year for stock buybacks still stands.

• SBI Shinsei Bank (8303 JP) has recommended SBI Holdings (8473 JP)’s tender offer of JPY2,800 per share, a 12.6% premium to the undisturbed price (11 May).
• There is no minimum acceptance condition. SBI and irrevocables from government entities represent 73.02% of voting rights, ensuring the implementation of tender squeeze-out procedures.
• The special committee failed to unanimously recommend the offer. Minorities will feel short-changed as the outcome is predetermined and the offer tends to favour the government shareholders.

• The Nikkei Index team has been quite conscious of market impact since the April 2000 debacle. For a few years after, things were quieter. In 2005, Fast Retailing spurred introspection.
• Float was low and became lower. Selection behaviour changed. Now there is a new consultation where “technical listings” would stay in, and phased “stepwise” inclusion would reduce inclusion impact.
• The proposal increases subjectivity, reduces the attractiveness of bets, but otherwise increases the likelihood they will follow the other selection rules. It STILL does not solve the high weight problem.

• Mitsubishi Corp (8058 JP)‘s ¥300bn buyback means 8+% of ADV every day from here to end-Dec 2023. Buy MitCorp vs trading houses with less of a buyback impact. 
• Rumours abound of an MSCI up weight for Jardine Matheson Holdings (JM SP). It wasn’t a clear-cut situation. And nothing came of it. 
• There are concerns about the stability of funding for JIP’s offer for Toshiba Corp (6502 JP) in the event that Kioxia (6600 JP)’s results collapse further.

• Many companies have low valuations due to the fact that not few managers are concerned about maintaining public listing with the idea of prioritizing it over growth in shareholder interests.
• Many companies only minimally respond to formally aligning board practices with the criteria of the Corporate Governance Code, and very few are creating value through advancing their corporate governance initiatives.
• TSE data shows that OP Margin is neutral and Asset Turnover and Financial Leverage are both negative for ROE, so immediate share repurchases are the effective way in raising ROE.

In this upcoming flash webinar, Insight Provider Travis Lundy will discuss the recent privatisation offer from SBI Holdings (8473 JP) for SBI Shinsei Bank (8303 JP). Japan’s SBI Holdings Inc said last Friday that it would take SBI Shinsei Bank private by launching a 154.2 billion yen (US$1.14 billion) tender offer, at 2,800 yen per share. Travis will go over the background and opportunities ahead of Monday’s Japan trading hours.

The Webinar will be hosted on Monday, 15 May 2023, 07:30 SGT.

Travis Lundy has 20+ years of experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies, with most of that time spent managing money.

• Ushio Inc (6925 JP) reported earnings on 11 May, with revenue +17.6% on the year, OP +21.4%, and NP +8.7% on the year. Div was unchanged at ¥50/share.
• Forecasts are for revenue +7.4%, OP -21.2%, and NP -27% (¥90.6/EPS). But importantly, the company also announced a HUUUUUGE Buyback. 
• Buying ≦20mm shares (17.0%) spending ≦¥30bn from 29May2023 to 10May2024. That’s 13.3% at the 12 May close. How this will work is unknown. There’s less detail than one would want.

• Takeda reported FQ4 and full-year FY03/2023 results. Reported revenue increased 9.5% YoY to ¥956.2bn (vs consensus ¥938.6bn) and OP of ¥88.6bn (vs consensus ¥144.5bn) vs an operating loss in 4QFY03/22.
• Full-Year revenue and OP increased 12.8% and 6.4% YoY to ¥4.0trn and ¥490.5bn respectively. While reported revenue beat guidance and consensus, OP fell slightly below these two.
• Takeda Pharmaceutical (4502 JP) ’s FY03/2024E guidance is too conservative as we think that the company has been careful not to disappoint investors if it fails to meet its own target.

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. Softbank Group
2. Wynn Macau Ltd
3. Central China Real Estate
4. Seazen (Formerly Future Land)
5. Agile Property Holdings

and more…

• Q1’23 revenues of ¥109.9 billion, better than forecasted, down 6.4% QoQ but up 10% YoY.
• Q2’23 forecasted flat sequentially, no full year 2023 forecast provided
• There’s a major headwind looming on the horizon for the broader silicon wafer segment…

• 4QFY22 saw the best result for the Vision Funds since 3QFY21; SVF private companies saw minimal valuation write-downs last quarter, and we suspect valuations may still be too optimistically marked
• Masa’s debts to SoftBank stand at USD5.2bn in 4QFY22; in addition, the group’s credit risk exposure to troubled company WeWork was over USD1.1bn at fiscal year end and going higher
• Softbank shares trade at a 46% discount to the stated NAV; with the Alibaba valuation “cushion” largely consumed, the potential Arm IPO is critical but private company valuations remain questionable

• Nikkei has started a market consultation on amendments to the methodology of the Nikkei 225 (NKY INDEX) focusing on the stepwise addition of lower liquidity stocks and on technical listings.
• Stocks that have relatively low ADTV compared to the expected index weight will be added at half the originally planned PAF with the full PAF implemented at the next review.
• If the proposed changes are implemented, some of the potential inclusions in September will be added at half their PAF with the increase to full PAF coming in March 2024.

• Marubeni (8002 JP) and Secom (9735 JP) today announced a Tender Offer to take private Marubeni’s subsidiary ARTERIA Networks Corp (4423 JP) at a 54% premium to the close. 
• Listed 4.5yrs ago, the company hasn’t grown hugely. Revenue growth is slow. EBITDA growth is flat. The takeout is 3.6x book, 7x estimated EBITDA, and about mid-teens PER. Without synergies.
• The price is OK, not great. The Board rejected the final price because it was too low and didn’t include synergies, then accepted because the bidders wouldn’t go further? Hmmm…

• ARTERIA Networks Corp (4423 JP) has recommended Marubeni Corp (8002 JP) and Secom Co Ltd (9735 JP)’s tender offer of JPY1,980 per share, a 54.1% premium to the undisturbed price.
• 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 16.61% ownership ratio.
• The offer is conditional on Chinese and Japanese regulatory approvals. The minimum acceptance condition requires a 33% minority acceptance rate. This is doable as the tender price is attractive. 

• We believe Toshiba guidance could be meaningfully lower than consensus estimates project. 
• While we expect some conservatism across industrial segments this could easily be offset by prolonged stagnation on the tech side. 
• Given concerning signs for NAND we believe weak guidance could shake confidence in deal funding.

• PHC Holdings (6523 JP) announced FY23 result, which is in-line with previously announced downward revised guidance. For FY23, revenue increased 5% to ¥356B, driven by diagnostics and life sciences business.
• Despite an impairment loss of ¥8.7B in Epredia, operating profit grew 145% to ¥20B. FY23 net loss narrowed to ¥3.2B from ¥8.5B in FY22.
• PHC has initiated FY24 guidance and guided for FY24 revenue of ¥355.5B (down 0.3% YoY). The company is expected to turn profitable in FY24, with net profit of ¥15.6B.

• Stock price increases only at the “TSE’s request” are anticipatory, and conversely, the gap with JPX Prime 150 Index components, which attract the attention of overseas investors, may widen.
• “TSE’s Request” effect is that TSE has changed the game by making it easier to compare managers of different companies according to P/B, thereby increasing managers’ awareness of stock prices.
• Just as all companies worked to “conserve energy” and become more competitive during the oil crisis, many companies’ stock valuations will rise in environment where managers must change their mindset.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• China SCE
• MGM China Holdings
• Softbank Group

• Mitsubishi Corp (8058 JP) yesterday announced earnings, forecast for FY23, higher dividend guidance, and a buyback. The headline number is 6% of shares and ¥300bn (which is nearer 4% now).
• ¥200bn of that ¥300bn is actually FY2022 “Additional Return” tacked onto a ¥100bn buyback for this year (FY23).  
• As is often the case, Shareholder Structure Matters. Because Berkshire Hathaway owns a large chunk of stock (7.4% according to interviews), that carves out a fair chunk not for sale.

• Quiddity’s “Who is Ready” series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
• CELSYS (3663 JP) (formerly known as “Artspark”) is a name we have been Bullish on in the last few months as it was a high-probability TOPIX Inclusion candidate.
• In the last couple of trading days, the stock has popped more than 30%. In this insight, we take a closer look at this situation.

• Diaper-Making machine maker Zuiko Corp (6279 JP) late last year introduced a shareholder benefit coupon program, and the stock has flown. Earnings improved from the trough too. 
• Now that the market cap is high enough, the company has applied to, and is now approved, to join TSE Prime, which means a TOPIX inclusion at end-June 2023.
• With 30 days of 6mo ADV, and much more of longer average ADV, this looks like a win, but there are…. considerations. Shareholder structure matters. Yet again. 

• Panasonic reported a 13% increase in sales and a 4% increase in net profit for fiscal 2023, driven by strong performance in its lifestyle, automotive, and connect segments.
• Panasonic expects to beat Street consensus operating profit forecasts, reflecting the recovery of auto demand and recognition of tax credits for its battery production
• Panasonic is a key beneficiary of continued expansion of EV market. Stock cheap at 8x EV/EBIT vs historical average of 11x

• Beenos Inc (3328 JP), despite missing earnings and offering smaller-than-expected buybacks, is potentially a deeply undervalued investment.
• Beenos holds 38% of its market-cap in cash 14% in GoTo shares 72% in VC investments and 9% in investment securities, which amounts to over 133% of its current market-cap.
• Distributing these excess assets to investors could potentially generate more than 100% upside.

• Fujifilm delivered its 4Q and full-year FY03/2023 results today. Revenue and OP increased 15.0% and 63.2% YoY to ¥764.7bn (vs consensus ¥715.7bn) and ¥70.4bn (vs consensus ¥62.5bn) respectively.
• The company’s full-year revenue and OP were above its own guidance as well as consensus, and we think FUJIFILM Holdings (4901 JP) ’s guidance for FY03/2024E is too conservative.
• The market continues to value Fujifilm as an imaging company and not in line with healthcare peers suggesting there is significant upside to the current valuation multiples.