Japan

• Kokusai has dropped 44% from its July peak, offering a long-term opportunity at reasonably attractive valuations. Management’s guidance looks conservative.
• KKR has reduced its stake from 43.4% to 23.2%, increasing the float while indicating that it still sees a long-term opportunity. Applied Materials has bought 14.7% of the company.
• The completion of a new factory in Japan should double production capacity to meet demand from makers of AI processors, high-bandwidth memory, 3D NAND and power devices.

• PKSHA is an AI company. It was before this year, and got a boost this past spring. The stock price rose 60% in two weeks in February and March 2024.
• Then it fell more than 50%. Back to late 2023 levels. High growth, growing into its valuations. Now moving to TSE Prime this week, TOPIX next month. 
• Impact in days of ADV is lower than impact in Real World Float metrics. There are lots of day-traders. This probably has legs.

• 12 days ago, Janaghan Jeyakumar, CFA published his September version of TOPIX Inclusions: Who Is Ready (September 2024). His chosen name was CELSYS (3663 JP), a long-time TSE-Prime inclusion bet. 
• This week on the 18th, they announced they were going to enter TSE Prime on 25 September. This was a somewhat well-known known. They were interested and had been. 
• The stock popped 15% the next day. It’s a small cap, but there is a lot of float.

• Aequitas Research’s weekly update on the IPOs, placements, lockup expiry and other ECM linked events that were covered by the team over the past week.
• On the IPO front, Midea Group Co Ltd A (000333 CH) and Bajaj Housing Finance (BHF IN) hogged much of the limelight this week as well.
• On the placements front, there were a few large US$400m+ placements across the region this week.

• Ain is best known for running prescription pharmacies but also has a lifestyle-oriented cosmetics chain called Ainz & Tulpe.
• Without this, the acquisition of FrancFranc would look odd, but the merger of the two will create genuine synergies and a lifestyle business targeting women in their 20s and 30s.
• The move makes sense given the pressure on margins in drug dispensing, Ain’s main business.

• Stay long Shin Kong Financial Holding (2888 TT) and buy more, or get long. CTBC Financial Holding (2891 TT) may make a better run at it, and may even bump.
• It’s a hard to be bearish Swire Pacific (A) (19 HK) at 0.34x P/B. Yet the Hong Kong property market remains a challenging space. To put it mildly.
• Seven & I Holdings (3382 JP) saw breathless news articles suggesting a foreign takeover became more difficult. Not really.

• 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: K Bank (279570 KS) has launched an IPO to raise up to US$734 million.
• Event-Driven developments: Fuji Soft Inc (9749 JP), Elan Corp (6099 JP), Trancom Co Ltd (9058 JP), Seven & I Holdings (3382 JP), China Traditional Chinese Medicine (570 HK). 

• Sales increased 5.2% YoY to JPY273.4bn, with operating profit growing 7.1% YoY to JPY15.1bn.
• The revised forecast for FY02/25 includes revenue of JPY850.8bn and net income of JPY22.2bn.
• FY02/25 will cover a 9.5-month period, with expected one-time expenses and unchanged annual dividend levels.

• Last year’s CAPEX plan was also a record high, but ROE growth was limited. We should closely monitor whether the allocation of CAPEX, shareholder returns, and retained earnings is appropriate.
• When a company finally begins using cash on hand for investments and lacks reliable track records, it should be monitored to ensure that it’s generating sufficient cash flow from CAPEX.
• The trend continues to remain that most investments are directed overseas. Note that many Japanese companies have a history of having difficulty managing their overseas operations.

• Yesterday, KKR amended its plans to take over Fuji Soft Inc (9749 JP) by creating a Two-Tender Scheme, effectively lowering the threshold for eventual success through clearly coercive tactics.
• 3D (23.46%) and Farallon (9.22%) had already tendered. Contractual terms make it difficult (not impossible) to withdraw. Assuming it goes through, KKR has 32.68%, quasi-negative control. 
• This revised structure is clearly abusive of minorities and NOT the deal Fuji Soft signed. This should cause Fuji Soft to Change their Opinion. Shareholder (and Bain) Pressure would help.

• Tokyo Metro (TKYMETRO JP) is scheduled to go public on 23 October 2024 with an IPO valuation of ~$4.4bn and a float market cap of ~$2.2bn.
• Fast-Entry for the one Global Index is expected at the close of 29 October 2024 with forecasted demand of ~17.4m shares and ~$133m.
• Quarterly inclusion at the May 2025 review has a higher probability with a slight price rally or an elevated IPO offering price. Forecasted demand is ~23.2m shares and ~$177m.

• Japan System Techniques Co., Ltd. (hereafter, JAST or the Company) is an independent system integrator that celebrated its 50th anniversary in March 2023.
• The Company develops systems for customers across a wide range of industries in a variety of fields, including finance, manufacturing, distribution, services, public services, telecommunications, transportation, and science and technology.
• It also offers four in-house JAST branded services, including the GAKUEN series of strategic university management systems for the education industry as well as the BankNeo integrated information system for financial institutions. 

• SanBio Co Ltd (4592 JP) received conditional and time-limited marketing approval for Akuugo suspension for intracranial implantation in Japan, for improving chronic motor paralysis resulting from traumatic brain injury.
• The company will run two or so rounds of commercial production to accumulate inventories in preparation for launch. The earliest possible timing for shipment is assumed to be Q1FY26.
• SanBio has a cash runway through H1FY26. However, operating expenses will decrease and Akuugo will start generating revenue by H1FY26, thereby providing some more cushion to cash runway.

• Q1 FY3/25 earnings look negative at first glance, with both sales and operating profit falling. However, the details show strong demand for GEO HOLDINGS’ core second-hand fashion business and smartphone sales, helping gross profit increase.
• The key earnings drivers were a fall in sales (-6.2% YoY to ¥100.15bn) due to difficult annual comps from new games sales.
• However, GEO HOLDINGS’ core second-hand fashion business and smartphones enjoyed robust demand, thanks to new store openings at home and overseas.

• Without the driving force to generate cash flow in excess of the discount rate (cost of capital), there is not enough power to push stock valuations higher and higher.
• The fact that 8% ROE is the threshold at which valuations change means that investors consider the cost of capital for Japanese equities to be roughly 8% on average.
• Little progress has been made since 10 years ago, when the Ito Report advocated “shift to corporate value management with an awareness of capital efficiency” and “engagement of institutional investors.”

• KKR has rejigged its Fuji Soft Inc (9749 JP) tender offer into a two-stage offer at an unchanged JPY8,800 price. The first stage has no minimum acceptance condition. 
• The first stage is designed to facilitate KKR’s acquisition of 3D and Farallon shares, which have tendered and will not withdraw their tenders without KKR’s consent.
• By securing 3D/Farallon’s shares, KKR has effectively blocked a Bain tender offer. Bain could launch a partial offer but it would be constrained by the tradeable share ratio criteria.   

• M3 Inc (2413 JP) will buy 50.1-55.0% of Elan Corp (6099 JP). Three principals+family have agreed to tender 50.1%. The premium is not huge. This is not an ATH. 
• There will be synergies. I am a little surprised by the deal+price (CEO is young, why sell so cheaply so early?) but it should be good for the TargetCo.
• There are possible post-tender complications on a high participation rate. I expect those can be cured relatively easily. 

• A Canadian company, Alimentation Couche-Tard, has made an unsolicited offer to acquire Japan’s Seven & I Holdings, the owner of the popular 7-11 convenience store chain, marking Japan’s largest foreign-led takeover attempt.
• This proposed takeover could signal a shift in Japan’s traditional resistance to foreign acquisitions, opening up opportunities for more global mergers and acquisitions in the country.
• The deal would create a global giant in the convenience store industry and represents a significant change in Japan’s deal-making and corporate culture.

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• Elan Corp (6099 JP) announced a partial tender offer and capital and business agreement with M3 Inc (2413 JP). M3 aims to make Elan a consolidated subsidiary.  
• The offer is for a minimum of 30.4 million (50.10% ownership ratio) and a maximum of 33.3 million shares (55.00% ownership ratio) at JPY1,040, 24.0% premium to the undisturbed price.
• Irrevocable from tendering shareholders will satisfy the minimum acceptance condition. The offer is unremarkable, suggesting a final proration materially above the minimum of 56.07%.

• Japanese eyewear manufacturer and retailer, Intermestic (262A JP) has filed for an IPO on the Tokyo Stock Exchange and is planning to raise proceeds of $112m.
• The company operates stores both domestically and internationally, and the company’s financials show strong improvement during the last few years.
• Intermestic has not yet announced the terms for its IPO, and in this insight, we have discussed the company’s business models, outlook and financials.

• Intermestic (262A JP) is looking to raise US$110m in its Japan IPO. Intermestic is an eyewear manufacturer of eyeglasses and eyeglass accessories in Japan.
• Utilizing a specialty store retailer of private label apparel (SPA) model, the firm aims to provide a one-stop shop whereby manufacturing and retailing of its products are handled in-house.
• In this note, we look at the firm’s past performance.

• In FY03/24, revenue was JPY1.2bn (+7.6% YoY), operating loss was JPY604mn (vs operating loss of JPY557mn in FY03/23), recurring loss was JPY601mn (vs recurring loss of JPY547mn in FY03/23), and net loss attributable to owners of the parent was JPY643mn (vs net loss of JPY550mn in FY03/23). In the Laser Device business, revenue from DFB lasers for semiconductor wafer inspection equipment and micromachining equipment grew, as did revenue from prototypes for mass production using quantum dot lasers.
• In the Visual Information Display business, sales of RETISSA MEOCHECK to medical institutions expanded. On the profit front, the operating loss increased due to inventory write-downs of JPY28mn in the Laser Device business and JPY57mn in the Visual Information Device business.
• For FY03/25, the company forecasts revenue of JPY1.2bn (-0.2% YoY), operating loss of JPY589mn (vs operating loss of JPY604mn in FY03/24), recurring loss of JPY592mn (vs recurring loss of JPY601mn in FY03/24), and net loss attributable to owners of the parent of JPY596mn (vs net loss of JPY643mn in FY03/24). The company anticipates a tenth consecutive year of operating profit in its Laser Device business thanks to growing adoption.

• Growth Inflection: Goldwin’s mid-term plan targets ¥190 billion in sales, driven by The North Face’s expansion and a transformation of the Goldwin brand globally.
• Profitability: Shifting from wholesale to direct-to-consumer, Goldwin has achieved significant margin growth, expanding operating margins to 19%, with further gains expected.
• Strong Capital Position: Goldwin’s robust balance sheet and anticipated ¥100 billion free cash flow support shareholder returns, alongside a proven management track record of delivering on growth objectives.

• Rather than “companies with advanced disclosure have higher ratios of female managers,” companies with high ratios of female managers are willing to disclose their ratios to show their progress.
• Women’s tenure in the company is shorter than men’s, which is one of the reasons for the low ratio of women in management positions.
• Changing from the “traditional division of labor in households” to a mindset in which men and women are equally responsible for household tasks is essential to solving the root problem.

• Japan Eyewear Holdings (5889 JP) reported 30% YoY revenue growth in H1FY25. Profit margins also remained high, with operating profit margin exceeding 33% and operating profit reaching ¥2.7B, 1.5x YoY.
• The company has left FY25 guidance unchanged. The company’s cautious stance, yen appreciation, and darkening outlook of China amid weak economic data are the major downside risks.
• We think reactions are overdone. Limited downside is expected from here. Encouraging SSS growth through continuous increases in unit price and accelerated store expansion will remain the key growth drivers.

• Timee Inc (215A JP) ’s share price has declined 26% over the last five days with the company reporting 3QFY10/2024 earnings on 12th September 2024.
• As we expected, top line growth has further slowed down while OPM for the quarter has dropped both QoQ and YoY concerning investors over Timee’s ability to generate sustainable margins.
• Timee’s proven business model has attracted Mercari and Sharefull to offer similar services, nevertheless, we would not be too concerned as Timee has the first mover advantage.

• Logistics takeovers are hot this year. Any cutting-edge-of-efficiencies business in the space is likely to get a look. Trancom Co Ltd (9058 JP) is one. 
• But while logistics assets put into bidding competition like Alps Logistics and Chilled & Frozen get high EV/EBITDA multiples, MBO transactions without competition get done too cheaply.
• Here again, an “Value Activist” “selling into the bid” to reinvest in the levered back end (at the takeover price). That tells you this deal is being done too cheaply.

• Trancom Co Ltd (9058 JP) recommended a Bain-sponsored MBO at JPY10,300, a 40.5% and 42.9% premium to the last close and undisturbed price, respectively. 
• The offer represents an all-time high but is lower than the midpoint of the IFA’s DCF valuation range and implies multiples below precedent transaction multiples. 
• While the Dalton irrevocable has a counteroffer clause, Mr Takebe (the largest shareholder) does not. Therefore, there is a low probability of a competing bidder emerging.   

• Few Japanese stocks that have advantages in profitability has led to the fact that investors who invest long-term in quality stocks have few Japanese stocks to choose from globally.
• It’s the profit margin on sales that has had the greatest impact on changes in ROE. Companies must now get their core competencies once again to regain competitiveness and profitability.
• Even if business selection and investment in promising businesses were to be implemented, it would be several years before they bear fruit. For many investors, this pace seems unacceptable.

• In 1H FY01/25, the company reported no operating revenue, an operating loss of JPY1.6bn, and R&D expenses of JPY1.0bn.
• Non-operating income was JPY401mn, primarily from foreign-exchange gains, while non-operating expenses totaled JPY16mn, resulting in a recurring loss of JPY1.2bn.
• The company received conditional marketing approval for SB623 in July 2024, with expected sales to begin in Q1 FY01/26.

• On August 7, 2024, Tokyo Communications Group, Inc. (hereafter, the “Company”) announced its 1H FY2024/12 financial results.
• Net sales fell 7.3% YoY to ¥2,771 mn, EBITDA was in the red with a loss of ¥16 mn (versus a positive EBITDA of ¥132 mn in 1H FY2023/12), and operating loss was at ¥211 mn, coming in worse than the ¥30 mn loss recorded in 1H FY2023/12.
• Ordinary losses increased from ¥56 mn to ¥88 mn, and 1H net loss expanded from¥87 mn to ¥158 mn.

• On 13 September, the Ministry of Finance of Japan added 7&I to a list of “core” designated companies based on results of voluntary inquiries to all listed companies.
• Several media reports suggest that the change in 7&I’s designation to core would complicate the proposed acquisition by Alimentation Couche-Tard (ATD CN). The core designation will not change Couche-Tard’s strategy.
• The change to 7&I’s designation to core will paradoxically push Couche-Tard to firm up its revised offer. An undemanding valuation protects the downside of a no-deal situation.

• Although the Nikkei 225 INDEX was rallying strong early in the year, from mid-March the rally started to falter, and after a fake recovery into July, it fell again, lower.
• Should the index go lower from last week’s Close at 36581.76, the next paragraphs of this insight will indicate what price levels are strong support to buy.
• The only doubt we have is that the index’s overall trend does not look good. A correction to 33000 (or lower) is a possibility – a negative YEARLY performance.

• Q1 FY04/25: Revenue JPY13.3bn (-5.3% YoY), Operating profit JPY1.5bn (-12.1% YoY), Recurring profit JPY1.5bn (-10.6% YoY), Net income JPY814mn (-5.7% YoY).
• Business support services for MVNOs: Revenue JPY2.5bn (+4.9% YoY), Operating profit JPY325mn (-29.7% YoY).
• 5G Homestyle services: Revenue JPY6.2bn (-18.2% YoY), Operating profit JPY769mn (-23.7% YoY), excluding fiscal year-end change, revenue +5.9% YoY, operating profit +26.0% YoY.

• On Friday 13 September, the Ministry of Finance of Japan released revisions to the list (Japanese, English) of company classifications under the Foreign Exchange and Foreign Trade Act (FEFTA)
• It appears 72 names were newly upgraded to “Core” (“3”), 21 newly listed companies (since the last list in Nov 2021) were labeled “3”, and six lost their Type3 designation. 
• Seven & I Holdings (3382 JP) saw breathless news articles Friday suggesting a foreign takeover became more difficult. Not really. 

• Raysum Co Ltd (8890 JP) has recommended Hulic Co Ltd (3003 JP)’s tender offer at JPY5,913, a 94.2% premium to the last close price of JPY3,045.
• The tender offer runs from 17 September to 30 October (30 business days), with payment commencing from 7 November. The offer represents an all-time high. 
• This is a done deal, as the irrevocable (Oasis) represents a 63.88% ownership ratio. With a knockout offer, the required 7.7% minority acceptance rate is easily achieved.  

• I tally 40 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Six new deals: Hotel Property (HPI AU), Guotai (1788 HK)/Haitong  (6837 HK), Joban Kosan (9675 JP), Dyna Mac (DMHL SP), Korea Zinc (010130 KS)/Young Poong Precision (036560 KS), Hulic (3003 JP).
• Key updates took place on Namoi Cotton Co Operative (NAM AU), Seven & I Holdings (3382 JP), Fuji Soft (9749 JP), Descente (8114 JP), & Silverlake Axis (SILV SP).

• Rather than lowering the minimum investment amount, attention is focused on whether the essence of the issue is whether the long-standing unit share system can be abolished.
• This system, which doesn’t grant voting rights to shareholders who don’t hold more than certain number shares, has led companies to turn inward-looking by making AGMs skeleton and accelerating cross-shareholdings.
• With corporate racketeer, who triggered the introduction of this system, gone and the reduction of cross-shareholdings beginning, shareholder units that can exercise voting rights for open AGMs should be reexamined.

• The change in control of Raysum Co Ltd (8890 JP) has a complex backstory. But one week shy of two years ago, Oasis launched a buyout to own 65%.
• The company had a strong MTMP. Oasis paid ¥1,700/share to own 65%. The MTMP came through, there was an offering, and it stayed near ¥3,000/share. 
• Now Hulic Co Ltd (3003 JP) has come out with a Tender Offer to buy the company for ¥5,913/share. That’s a 94% premium and 3.5x what Oasis paid 2yrs ago.

• Operating revenue increased 79.6% YoY to JPY1.5bn, driven by strong sales of TDM-621 across multiple regions.
• Operating loss narrowed to JPY317mn, with SG&A expenses rising 16.0% YoY to JPY1.2bn and R&D expenses up 1.7% YoY.
• Recurring loss of JPY787mn, including foreign exchange losses of JPY449mn and interest expenses of JPY21mn.

• 1Q FY2025/3 Earnings Result Summary: Key consolidated figures included net sales of ¥6,298 mn (+11.7% YoY), operating profit of ¥284 mn (+132.9% YoY), ordinary profit of ¥318 mn (+137.0% YoY), and profit attributable to owners of parent (hereafter, net profit) of ¥181 mn (+192.4% YoY).
• The full-year forecast for FY2025/3 remains unchanged from the initial forecast announced on May 13, 2024.
• Higher sales and profits in the DX&SI business and Package business fueled 1Q earnings growth.

• Committed to profitability improvement – Resorttrust is a timeshare resort hotel operator, offering exclusive, high-quality services to resort hotel membership owners in Japan.
• Successful unit price hikes on the back of outstanding customer loyalty in the hotel business and operational efficiency optimization in membership-based medical services, the profitability is set to improve throughout the current medium-term plan (FY3/23- FY3/28).
• With a healthy balance sheet, Resorttrust is poised to accelerate growth through facility development. 

• Revenue: JPY3.3bn (-1.9% YoY), Operating profit: JPY388mn (-62.8% YoY), Recurring profit: JPY496mn (-52.3% YoY), Net income: JPY374mn (-44.6% YoY).
• Contract processing services revenue: JPY2.0bn (-12.9% YoY), Consulting services revenue: JPY161mn (-54.9% YoY), Medical device sales: JPY711mn (+35.4% YoY), Cosmetics sales: JPY419mn (+145.0% YoY).
• Revised earnings forecast for FY10/24: Revenue JPY4.4bn (-3.0% YoY), Operating profit JPY420mn (-65.6% YoY), Recurring profit JPY527mn (-55.9% YoY), Net income JPY417mn (-54.8% YoY).

• Revenue declined YoY to JPY19.3bn, with an operating loss of JPY199mn and a net loss of JPY329mn.
• On-demand Economy, Digital Marketing, and System Solutions segments saw revenue and profit declines; Sharing Economy turned an operating profit.
• Investments in Web3 and SNPIT app reduced On-demand Economy profits; premium membership grew despite customer acquisition costs.