Japan

In today’s briefing:

Last Week in Event SPACE: Toshiba, Asian Defence Contractors, Arclands Corp/Services, Bank of Kyoto

Last Week in Event SPACE: Toshiba, Asian Defence Contractors, Arclands Corp/Services, Bank of Kyoto

By David Blennerhassett

Toshiba Corp (6502 JP) is ultimately quite skippable. While ¥4,620 seems like “the wrong price” over a 5-year period, it is not clear that is the wrong price now.
Global military touches a new high. South Korean defence contractors, such as Hyundai Rotem Company (064350 KS), are big beneficiaries.
Historically, the “event” which helps Murakami-san get out – with respect to Arclands Corporation (9842 JP)/Arcland Service (3085 JP) – is not one which is suitable for “normal” investors.

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May 06

Daily Brief Japan: Nihon M&A Center, Tokyo Stock Exchange Tokyo Price Index Topix and more

By Shifara Samsudeen, ACMA, CGMA

In today’s briefing:

Nihon M&A: Puts Aside Mid-Term Growth Plan by Two Years
Rather, Listing Criteria for Prime Market Should Be Modified to the Original Concept of the Market

Nihon M&A: Puts Aside Mid-Term Growth Plan by Two Years

Nihon M&A reported 4QFY03/2023 results last week. Revenue increased 86.7% YoY to ¥11.4bn (vs consensus ¥10.0bn) while OP for the quarter more than quadrupled to ¥4.2bn (vs consensus ¥4.9bn).
Full-Year FY03/2023 revenue of ¥41.3bn and OP of ¥15.3bn were slightly below guidance of ¥42bn and ¥18bn respectively and the company has put aside its medium-term growth plan by 2years.
We continue to prefer Baycurrent over Nihon M&A Center (2127 JP) in the Japanese consulting/M&A space as Baycurrent continues to make strong progress.

Rather, Listing Criteria for Prime Market Should Be Modified to the Original Concept of the Market

While the listing criteria aren’t consistent with the initial concept of the prime market, “investment targets for global investors,” “transitional” companies that don’t meet those listing criteria are allowed listing.
Delisting through TOB or MBO will lead to the metabolism of listed companies and maintain the quality of the TSE as an “investment target for global investors” market.
It is not about bringing “transitional” companies into compliance with the listing criteria of the prime market, but about modifying the listing criteria to the original concept of the market.

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May 05

Daily Brief Japan: Toshiba Corp, Japan Tobacco and more

In today’s briefing:

Toshiba (6502) – Thinking About the Arb
Japan Tobacco High Conviction Update: Potential 62% Upside

Toshiba (6502) – Thinking About the Arb

Toshiba is trading at a 12-13% annualised return on the arb when using the expected Tender Offer Start Date proposed in the Takeover Announcement on 23 March 2023.
On Day 1-2 post-announcement, Toshiba traded at an 11-13% annualised spread. Since the announcement, a 12-name Peer Basket is up 11+% meaning Toshiba back end risk has shrunk.
Forward consensus EPS ratios have fallen, in part due to the shift forward one fiscal year by comps. We’ll see where those lie in a week when earnings come.

Japan Tobacco High Conviction Update: Potential 62% Upside

By Oshadhi Kumarasiri

Japan Tobacco’s 1Q23 performance exceeded consensus expectations, with revenue and OP surpassing by 5.3% and 12.3%, respectively.
Consensus expected no volume growth for Japan Tobacco in declining combustible tobacco market; targeted mid-single digit constant currency revenue growth via pricing.
Higher cigarette prices are expected to contribute to Japan Tobacco (2914 JP)‘s OP growth, which we anticipate will exceed its historical peak levels in the next few years.

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May 04

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

In today’s briefing:

Beenos: Big Buybacks Forthcoming
To Make the TSE Prime Market in Line with the Original Concept of the Market

Beenos: Big Buybacks Forthcoming

By Oshadhi Kumarasiri

Beenos Inc (3328 JP) is currently one of the cheapest stocks in the Japanese e-commerce sector with a consensus FY+2 EV/OP of 4.5x with an OP CAGR of around 130%.
In addition, the relatively cheap-looking valuation multiple excludes the current valuation of Beenos’ incubation program investments.
We think Beenos can sell its stake in GoTo in the short-term to conduct a big share buyback as the management thinks that Beenos is unfairly valued by the market.

To Make the TSE Prime Market in Line with the Original Concept of the Market

As for “liquidity,” one of the problems of TSE market restructuring, if the selection criteria for TOPIX components are raised, fewer companies will be forced to cling to prime market.
Regarding “engagement” challenge, a solution is reducing the number of TOPIX components, since low fees and many portfolio companies of passive funds prevent investment managers from devoting resources to engagements.
Regarding “sustainable growth” challenge, inflation would be a catalyst for learning from history, where an environment that forced all companies to change caused a change in the mindset of managers.

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May 03

Daily Brief Japan: Arclands Corporation, Advantest Corp and more

In today’s briefing:

JAPAN ACTIVISM: Murakami-San Goes Substantial on Arcland SHD (3085) Ahead of Merger Vote Record Date
Advantest (6857 JP): 20% Potential Downside

JAPAN ACTIVISM: Murakami-San Goes Substantial on Arcland SHD (3085) Ahead of Merger Vote Record Date

Today, City index Eleventh, the corporate entity often used by noted activist Yoshiaki Murakami, announced (EDINET filing) they owned 1.756mm shares or 5.31% of Arcland Service (3085 JP)
In mid-April, Arclands Corporation (9842 JP) announced it would merge with 55%-owned restaurant subsidiary Arclands SHD. Murakami-owned 5+% of Arclands at the time. Then it sold 9842 and bought 3085.
This looks like a confusing set of moves. It is not as confusing when you think about it. He is setting up something for later.

Advantest (6857 JP): 20% Potential Downside

By Scott Foster

FY Mar-24 guidance – sales down 14%, operating profit down 37% – is not extreme compared with previous cycles.
History shows that downturns at Advantest can last for two or even three years, not just one. Weak economic conditions add to this possibility.
The share price has rebounded from the recent sell-off, but optimism is unwarranted. Historical valuation ranges suggest potential downside of 20% or more.

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May 02

Daily Brief Japan: Astellas Pharma, M3 Inc, Tokyo Stock Exchange Tokyo Price Index Topix and more

By Shifara Samsudeen, ACMA, CGMA

In today’s briefing:

Astellas Pharma (4503 JP): New Acquisition to Add Promising Drug Candidate in New Therapeutic Area
M3: Guidance Points to Further Slowdown in Growth
Few Companies Include ROE and ROIC as KPIs in Their Mid-Term Management Plans
Astellas Pharma Buys Iveric Bio: Help Offset Upcoming Patent Expiry of XTANDI

Astellas Pharma (4503 JP): New Acquisition to Add Promising Drug Candidate in New Therapeutic Area

By Tina Banerjee

Astellas Pharma (4503 JP) is acquiring the U.S.-based clinical stage biopharmaceutical company IVERIC bio (ISEE US) for ~$5.9B. Iveric Bio focuses on the discovery and development of novel ophthalmology treatments.
Iveric’s lead drug candidate Avacincaptad Pegol for the potential treatment of Geographic Atrophy is under FDA review with PDUFA action date of August 19, 2023.
The acquisition will be funded by a combination of bank loan, issuance of commercial paper totaling ~¥800B, and internal cash. The acquisition is expected to complete by 3Q23 (July–September).

M3: Guidance Points to Further Slowdown in Growth

M3 Inc (2413 JP) reported 4QFY03/2023 results on Friday. Both revenue and OP increased 3.1% and 52.0% YoY to ¥55.7bn (vs consensus ¥60.8bn) and ¥16.0bn (vs consensus ¥17.8bn) respectively.
We previously raised concerns over slowdown in medical platform earnings, and it seems that m3 has not been able to generate meaningful growth from its overseas businesses.
The company expects FY03/2024E revenue growth to further drop to about 8.3% marking the slowest annual increase in revenue over the last two decades.

Few Companies Include ROE and ROIC as KPIs in Their Mid-Term Management Plans

By Shifara Samsudeen, ACMA, CGMA

Although many companies now disclose numerical targets in their mid-term management plans, only a few still use ROE or ROIC as numerical targets(15% 1,801 companies of Metrical Universe, March 2023).
The fact that many companies that don’t include ROE or ROIC as KPIs indicates that the management wasn’t aware of the return from the shareholders’ perspective or cost of capital.
The 3-year mid-term business plan is built on the foundation of the actual project in progress and should be outlined to reflect its cash allocations and cash flow returns.

Astellas Pharma Buys Iveric Bio: Help Offset Upcoming Patent Expiry of XTANDI

Japanese drug maker Astellas Pharma announced on Monday that it has entered into a definitive agreement to acquire 100% of opthalmalogy player Iveric Bio for a total consideration of U$5.9bn.
Astellas Pharma (4503 JP) will pay US$40 per share of IVERIC bio (ISEE US) , 64% premium to the unaffected closing price of US$24.33 per share as of 31st March 2023.
As Astellas’ blockbuster drug XTANDI’s exclusivity is nearing expiry, we think Iveric’s key drug asset ACP should offer some protection over loss of XTANDI’s revenues in the future.

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May 01

Daily Brief Japan: Bank of Kyoto and more

In today’s briefing:

JAPAN ACTIVISM: Silchester and Bank of Kyoto (8369) Redux

JAPAN ACTIVISM: Silchester and Bank of Kyoto (8369) Redux

Last year, Silchester International Investors wrote a series of letters to Bank of Kyoto management and then asked to put items on the AGM agenda. It lost.
A Bloomberg article last week suggests Silchester will ask for a ¥62 special div and a ¥5bn buyback this year. The Silchester letter is “due” by 30 April.
The Bank has already delivered most of the ask this year (¥3bn in upped div, and ¥5bn in buybacks). Silchester will lose. Expect no Conversion on the Road to Kasumigaseki.

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Apr 30

Daily Brief Japan: Astellas Pharma, Arcland Service, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Astellas Pharma (4503 JP): FY23 Result and FY24 Guidance Meet Expectation; New Drugs Hold Key
(Mostly) Asia M&A, April 2023: Arcland Service, Lian Beng, Silk Laser, Breaker Resources, Blackmores
The Reasons for the Criteria Selected for the Directors’ Skills Matrix Are Still Unclear

Astellas Pharma (4503 JP): FY23 Result and FY24 Guidance Meet Expectation; New Drugs Hold Key

By Tina Banerjee

Astellas Pharma (4503 JP) recorded 17% growth in revenue to ¥1,519B in FY23, driven by 24% growth of Xtandi. Core operating profit grew 17% and core net profit increased 18%.
The company has guided for flat revenue and core operating profit for FY24, mainly due to negative impact of Fx.
Astellas expects to obtain FDA approval for fezolinetant for vasomotor symptoms associated with menopause in May 2023. The company will file for marketing approval for zolbetuximab in Q1FY24.

(Mostly) Asia M&A, April 2023: Arcland Service, Lian Beng, Silk Laser, Breaker Resources, Blackmores

By David Blennerhassett

For the month of April, 6 new deals (firm and non-binding) were discussed on Smartkarma with an overall announced deal size of ~US$3bn.
The average premium for the new deals announced (or first discussed) in April was 23%.
This compares to the average premium for all deals in 2022 (106 deals), 2021 (165 deals), 2020 (158 deals), and 2019 (145 deals) of 41%, 33%, 31%, and 31% respectively.

The Reasons for the Criteria Selected for the Directors’ Skills Matrix Are Still Unclear

The rapid spread of companies, especially large companies, disclosing the skills matrix was triggered by Supplemental Principle 4-11-(i), which was added to the Corporate Governance Code.
While more companies focus disclosure on skills matrix of directors, it’s questionable whether these criteria have been validated to select those who can help expand the value of the company.
The process should ensure that the nomination process is based on the skills needed to run the company, not on who is close to the president of the company.

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Apr 29

Daily Brief Japan: Kansai Paint, Hokkoku Financial Holdings, Srg Takamiya, iShares MSCI ACWI ETF and more

In today’s briefing:

Kansai Paint (4613) Announces Large Sale of Cross-Holdings – Buyback Here We Come
Hokkoku Financial (7381) Earnings Report Delay But HUGE Buyback. Again.
Takamiya (2445 JP) Initiation Report
Stay Tactically Overweight Defensives; Remain Overweight Europe, Japan, & EAFE. Buys in Defensives

Kansai Paint (4613) Announces Large Sale of Cross-Holdings – Buyback Here We Come

Today after the close, Kansai Paint (4613 JP) announced it would sell 3 investment securities in the current quarter and would book a gain of “around ¥30bn.”
As discussed in Kansai Paint (4613 JP) Secondary Offering & Buyback and All the Subsequent Flows, Toyota’s sale of KP shares meant KP could sell Toyota shares. Now they will.
This is a set-up to another buyback, eventually to unwind more in-bound cross-holdings and to raise ROE.

Hokkoku Financial (7381) Earnings Report Delay But HUGE Buyback. Again.

Yesterday Hokkoku Financial Holdings (7381 JP) came out with an odd decision to delay earnings from 28 April to 8 May. Volume traded.
Today, despite not reporting earnings, the Kanazawa-based regional bank announced a BIG buyback with subsequent share cancellation. This was not unexpected. They have an aggressive policy which started last year.
Hokkoku Bank policy introduced last year is special. It has worked. They are pursuing it. Expect more policy action like this as banks report.

Takamiya (2445 JP) Initiation Report

By Sessa Investment Research

Accelerating de facto standardization of the Iq System
Guiding for double-digit growth in sales and profit in FY23/3
Roadmap for sustainable growth. Takamiya is currently implementing its medium-term management plan ending in FY2024/3.

Stay Tactically Overweight Defensives; Remain Overweight Europe, Japan, & EAFE. Buys in Defensives

By Joe Jasper

Our 2023 outlook, initially discussed in our January 6th 2023 Int’l Compass, was for $93 to cap upside on the MSCI ACWI (ACWI-US); this has again proven prescient.
Since late-January/early-February we have recommended shifting to defensives, and MSCI ACWI defensive Sectors including Health Care (IXJ-US), Utilities (JXI-US), and Consumer Staples (KXI-US) are now hitting 3-4-month RS highs.
With the ACWI-US just now starting to turn down after testing $93, we continue to recommend a tactical overweight to the aforementioned defensive Sectors, and also to gold miners (GDX-US).

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Apr 28

Daily Brief Japan: Fast Retailing, Fujitsu Ltd, Kirin Holdings, JVC KENWOOD, Nidec Corp, Jeol Ltd, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

The Fast Retailing (9983) Selldown Conundrum – Not Now, But Soon… Then For A Long Time
BIG Fujitsu (6702 JP) Buyback – It’s a Lot, but Not, but Still Big
Kirin’s Bid for Blackmores: Leveraging Regulatory Expertise to Enter China’s Supplement Market
JVC Kenwood (6632) – After Two Banner Years, Earnings to Fall, but Large Buyback For 6mos
Nidec (6594 JP): Buy into Current Weakness
Quiddity Leaderboard JPX-Nikkei 400: End-Apr 2023
Even Though the June AGM Was Spread over 4 Days, 26.4% of the Companies Were Concentrated on June 29

The Fast Retailing (9983) Selldown Conundrum – Not Now, But Soon… Then For A Long Time

Fast Retailing (9983 JP) announced Q2 earnings two weeks ago. Revenues were good. OP was good. And the company raised full-year forecasts for Sales, OP, Pre-tax, and Net Profit.
The stock popped sharply. It isn’t “cheap” but it is under-owned, actively. And revenues up 20%yoy is a very good look.
The Conundrum: the more active investors decide they like it, the more there is to sell. That creates interesting opportunities.

BIG Fujitsu (6702 JP) Buyback – It’s a Lot, but Not, but Still Big

Fujitsu earnings are out. Forecasts are in, lighter than consensus.
But there is a buyback. Looking at the way last year’s was executed is not that informative but it may be useful.
This one is big enough to matter but not big enough to get excited about until we get confirmation.

Kirin’s Bid for Blackmores: Leveraging Regulatory Expertise to Enter China’s Supplement Market

By Oshadhi Kumarasiri

Kirin Holdings (2503 JP) is eyeing the vitamin game with a proposal to buy Blackmores at AU$95 per share, representing a 23.7% premium over the stock’s most recent closing price.
Blackmores Ltd (BKL AU)‘s expertise in navigating China’s stringent regulations could be the missing piece for Kirin to gain access to the lucrative supplement market in China.
Our main concern is Kirin’s history of unsuccessful overseas business acquisitions, particularly outside of its core beer business.

JVC Kenwood (6632) – After Two Banner Years, Earnings to Fall, but Large Buyback For 6mos

Today, JVC KENWOOD (6632 JP) announced earnings, its forecast for this next year, and the outlines of its new Mid-Term Management Plan.
That plan has the run to 2025 seeing sales rise slightly, Operating margins rising slightly. EBITDA margins at last year’s level or better, and Operating CF like last year.
They also announced a buyback which they hoped would help them boost ROE and PBR to 1.0x as quickly as possible. The TSE pressure is working.

Nidec (6594 JP): Buy into Current Weakness

By Scott Foster

FY Mar-23 results fell short of expectations and management is guiding for a weak 1H in the new fiscal year. This looks like a buying opportunity.
The E-Axle business should reach break-even this year. Rising EV demand in China, Europe and elsewhere, plus general electrification, should take the overall Automotive operating margin to 10%.
Projected valuations are attractive even if sales do not reach management’s ambitious target.

Quiddity Leaderboard JPX-Nikkei 400: End-Apr 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 2023 based on trading data as of end-April 2023.

Even Though the June AGM Was Spread over 4 Days, 26.4% of the Companies Were Concentrated on June 29