Japan

In today’s briefing:

Rakuten Bank IPO Trading – Ample Upside
Rakuten Bank IPO: Trading Debut
Modest ROE Growth Expected to Increase Shareholder Proposals for Higher Shareholder Returns

Rakuten Bank IPO Trading – Ample Upside

By Sumeet Singh

Rakuten Bank (5838 JP), the online banking arm of Rakuten (4755 JP), raised around US$630m in its Japan IPO.
RB is the largest internet bank in Japan, by number of accounts. As of Dec 22, it had 13.3m deposit accounts with a total deposit base of JPY8.8tn.
In our earlier notes, we have looked at various aspects of the deal. In this note, we talk about the deal dynamics and trading updates.

Rakuten Bank IPO: Trading Debut

By Arun George

Rakuten Bank (5838 JP) priced its IPO at JPY1,400 per share to raise gross proceeds of US$620 million. The shares will start trading on 21 April.
We previously discussed the IPO in Rakuten Bank IPO: The Investment Case, Rakuten Bank Vs SBI Sumishin Net Bank and Rakuten Bank IPO: New Price Range Is a Steal.
Peers have re-rated and our valuation analysis points to a fair value of around JPY1,900 per share, 36% above the IPO price. Therefore, the IPO price remains attractive.

Modest ROE Growth Expected to Increase Shareholder Proposals for Higher Shareholder Returns

The fact that there is a certain correlation between ROE+DOE and TOPIX reconfirms that it’s effective to ask management to improve performance in terms of both profitability and shareholder return.
While % change in shareholders’ equity moves in line with % of change in net profit, dividend payout moves moves differently. Many companies still adopt a “stable dividend” policy.
If shareholders propose share repurchases, dividend increases, etc., it can be said that management has determined that the shareholder return (ROE+DOE) it has secured is not sufficient.

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Apr 19

Daily Brief Japan: Toyo Construction, Yamada Denki, Softbank Group and more

In today’s briefing:

YFO Goes Hard for Board Spill – Independents AND Executives
Yamada Denki (9831) Buyback Almost Done and Odd Dividend “Cut”, and a Lightbulb Dilemma
Softbank (9984 JP) – Focus on the SVFs, Are the Private Companies Appropriately Marked?

YFO Goes Hard for Board Spill – Independents AND Executives

At end-March, Toyo Construction (1890 JP) started playing hardball against YFO. They rejected the EGM call; they sent a letter to METI crying “FEFTA Breach!”, and raised the div BIGLY.
The new div at ¥63/share was meant to get the share price over ¥1,000/share so the YFO bid at that price would not be meaningful. So far, no luck.
But YFO, which had threatened to propose a new slate, came out today with a list of nine, including two who would be executive directors. 👀👀

Yamada Denki (9831) Buyback Almost Done and Odd Dividend “Cut”, and a Lightbulb Dilemma

In May 2022, Yamada Denki (9831 JP) announced a very large buyback. GINORMOUS – in fact – at 23.9% of shares out ex-Treasury if maximum shares were bought.
So far, YDH is 83.5% through, and at the recent pace, they will end it 8 May having bought 183-184mm shares (21.9% of TSO) spending 86.6% of funds allocated.
That’s why the announcement lowering the March 2023 div to ¥12/share vs ¥18/share last year was just weird. And bodes badly. We need a lightbulb moment for a lightbulb dilemma.

Softbank (9984 JP) – Focus on the SVFs, Are the Private Companies Appropriately Marked?

By Victor Galliano

Softbank Vision Funds 1 and 2 were the biggest combined holdings at December 2022, accounting for 30% of group equity value; SVF private companies accounted for 73% of equity value
To December-end 2022, public companies in SVF2 were marked down by 52% versus investment cost, whereas SVF2 private companies were marked down by a more modest 33% versus investment cost
We believe that SVF2 private company valuations are at risk of further markdowns in 4QFY22 results, with many of these investments made close to the period of peak pandemic valuations

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Apr 18

Daily Brief Japan: Nitori Holdings, Rakuten Bank, Money Forward, Tokyo Stock Exchange Tokyo Price Index Topix, Seven & I Holdings and more

In today’s briefing:

Nikkei 225 Sep 2023 Rebalance Gets Interestinger – Possible Fast Retailing Cap and Zozo Stretch
Rakuten Bank IPO: First Day Trading
Money Forward: Lower S&M Spending in 1Q Drives Losses Down
Maintaining Labor Productivity by Cutting Working Hours Was Effective but Risks Should Be Considered
Seven & I: The Biggest Barrier to Change Has Gone

Nikkei 225 Sep 2023 Rebalance Gets Interestinger – Possible Fast Retailing Cap and Zozo Stretch

By Shifara Samsudeen, ACMA, CGMA

With 3.5 months left in the dataset, the data is pretty close to settled. The interesting bits are elsewhere. There are three auto DELETEs and two auto ADDs. Maybe.
One auto-ADD is Toshiba, which may have a deal on it. That leaves two to add for sector balance. That could be Nitori (9843 JP) and Zozo (3092 JP).
Friday’s move on Fast Retailing brings in the issue of the new capping function. That would be a different US$2bn selldown. Lots of gory details here.

Rakuten Bank IPO: First Day Trading

By Oshadhi Kumarasiri

It appears that Rakuten Bank (5838 JP) received a significant number of subscriptions at the revised offer range, leading the company to set the IPO price at ¥1,400 per share.
The grey market trading suggests that shares are currently trading close to the lower end of the previous IPO price range, indicating a potential upside of 20% on the debut.
The IPO has potential to rise beyond 20% on debut. However, in the event that it does not pop more than 100%, we would looking to buy more shares.

Money Forward: Lower S&M Spending in 1Q Drives Losses Down

MF reported 1QFY11/2023 results on Friday. Revenue increased 43.0% YoY to ¥6.8bn (vs consensus ¥6.5bn) while operating losses dropped to ¥1.59bn vs ¥1.65bn in 1QFY11/22 (vs consensus ¥2.0bn).
The company’s S&M spending is the lowest during first quarter of the year, which drove losses down. However, the company has guided for higher S&M spending in 2Q.
Our analysis on Money Forward (3994 JP) BO SAAS vs Non-BO SAAS shows that non-BO businesses’ GPM has continued to decline suggesting that these non-BO businesses only help inflate revenues.

Maintaining Labor Productivity by Cutting Working Hours Was Effective but Risks Should Be Considered

Many companies have worked to ensure labour productivity by curbing personnel costs by reducing work hours and shifting from full-time to part-time workers, as well as by controlling depreciation.
Maintaining labor productivity by converting to part-time and reducing working hours of full-time employees has been an effective measure to ensure operating profits margins, but it also carries risks.
Personnel cost/sales have bottomed out in 2018 and are on the rise. With cost structures changing dramatically after the economic reopening, controlling labor costs will be more difficult than ever.

Seven & I: The Biggest Barrier to Change Has Gone

Seven & I has announced major restructuring of its struggling Ito-Yokado GMS chain – a company that big investors have long demanded be sold off entirely.
The latest round of cuts had to wait until the company’s founder finally passed away, although are likely not going to be the last.
Seven & I has long had a coherent plan to rationalise – but was just waiting for the founder to pass – with a series of disposals now likely.

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Apr 17

Daily Brief Japan: Rakuten Bank, Arcland Sakamoto, Nikkei 225, Baycurrent Consulting and more

In today’s briefing:

Rakuten Bank (5838) IPO – Let’s Go! (Part 2)
Arclands (9842) Overpays for Arclands Service Holdings (3085)
Japan and Korea Action Levels
Baycurrent Consulting: Strong Earnings Beat with an Overly Conservative Guidance

Rakuten Bank (5838) IPO – Let’s Go! (Part 2)

SBI Sumishin Net Bank (7163 JP) lowered its listing price vs what were already lowered expectations from a year prior. Then Rakuten Bank (5838 JP) lowered its IPO range.
SBI Sumishin dilly-dallied around IPO price for three days then went nuts, rising 40% as of Friday morning. Rakuten Bank’s IPO looks dirt cheap now.
But it is worthwhile comparing it on a spectrum of OTHER Japanese banks and neobanks.

Arclands (9842) Overpays for Arclands Service Holdings (3085)

By Shifara Samsudeen, ACMA, CGMA

On Friday Arcland Sakamoto (9842 JP) and restaurant franchise subsidiary Arcland Service (3085 JP), which it launched in 1993 and IPOed in 2007, announced they had agreed to merge.
Arcland SHD runs 18 restaurant brands, of which Katsuya is most well-known, with a total of 750 or so restaurants managed globally. It has grown consistently.
The merger ratio is at an all-time high for Arcland SHD. This should be a done deal but I might expect some complaints. I think Arclands is probably overpaying.

Japan and Korea Action Levels

By Thomas Schroeder

Japan and Korea are meeting rally objective action points. NKY 28,500 touted as the level to short. Korea meeting the 337/338 upper wedge range target to lock in some gains.
Japan has formed previous tops below 29,000. Korea will need to backfill and likely retest the top of the rising wedge given the impulsive nature of the rise.
These topping patterns show conviction to form bigger cycle peaks into late April ahead of a more negative phase in May. Factor in final SPX push to 4,200-20.

Baycurrent Consulting: Strong Earnings Beat with an Overly Conservative Guidance

Baycurrent reported fourth quarter and full-year FY02/2023 results on Friday. 4Q revenues increased 32.1% YoY to ¥21.2bn (vs consensus ¥20.7bn) and OP increased 60.8% to ¥9.6bn (vs consensus ¥8.3bn).
Full-Year revenue and OP increased 32% and 39% YoY respectively to ¥76.1bn and ¥29.9bn, beating own guidance by 7% and 15% respectively.
The company’s FY02/2023E guidance is too conservative as there has been no signs of an earnings slowdown as DX consulting and high-value add projects would drive next phase of growth.

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Apr 16

Daily Brief Japan: Arcland Service, Money Forward, Universal Entertainment, Tokyo Stock Exchange Tokyo Price Index Topix, Rakuten Bank and more

In today’s briefing:

Arcland Service (3085 JP): Share Exchange Offer from Arclands Corp
Money Forward (3994) | Costs Under Control
Okada Casino Momentum Signals an Entry Point Despite Legal Woes with Its Spac Hedge Fund Deal
Activist Investors Have Been Consistent, but Environment Around Companies Has Changed Significantly
ECM Weekly (16th Apr 2023) – Rakuten Bank, Harita Nickel, Merdeka Battery, ZJLD, Adicon, Supcon

Arcland Service (3085 JP): Share Exchange Offer from Arclands Corp

By Arun George

Arcland Service (3085 JP)/Arcland SHD has recommended Arcland Sakamoto (9842 JP)/Arclands’ share exchange offer at 1.87 Arclands shares per Archland SHD share.
The implied offer value of JPY3,051.84 per share at Arclands’ last close price is a 35.3% premium to the undisturbed price of JPY2,256.00 per share (14 April).
The offer requires Arcland OGM (25 May) and Arcland SHD EGM (22 June) shareholder approval. Arcland SHD shareholders will be supportive as the deal metrics are attractive.

Money Forward (3994) | Costs Under Control

By Mark Chadwick

Money Forward’s Q1 sales grew 43% YoY to 6.8 billion yen, which beat the top end of guidance (Y6.2-6.6b).
EBITDA came in at minus 704 million yen, far ahead of guidance for -Y1.2-1.7b. Money Forward drastically curtailed hiring in the quarter.
Money Forward’s stock has turned in a 26% performance so far this year. We believe the stock can continue to rally on focused cost control.

Okada Casino Momentum Signals an Entry Point Despite Legal Woes with Its Spac Hedge Fund Deal

By Howard J Klein

26 Capital, a US hedge fund that has crafted an innovative spac deal to bring the leading Manila casino property into an IPO by this fall has stalled.
The overall tone of recovery in Philippine gaming in this early post-covid era is speeding up and expected to meet or surpass baseline 1919 growth easily.
We see an attractive entry point for Okada’s owner, Tokyo traded Universal Entertainment, based both on its strong performance and the ultimate success of the IPO.

Activist Investors Have Been Consistent, but Environment Around Companies Has Changed Significantly

While the shareholding of banks and insurances has dropped significantly, that of foreign shareholders has risen to 30%, making it impossible to ignore the opinions of overseas investors as before.
Since the introduction of the Corporate Governance Code, the concept of governance and ROE has permeated companies, making it possible for them to understand the background of activist investors’ proposals.
Besides the close relationship between changes in valuations and changes in foreign shareholding, overseas investors account for 70% of TSE’s transactions, forcing management to increasingly listen to overseas investor’s voices.

ECM Weekly (16th Apr 2023) – Rakuten Bank, Harita Nickel, Merdeka Battery, ZJLD, Adicon, Supcon

By Sumeet Singh

Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
Momentum appears to be picking up on the IPO front with a few successful listing helping sentiment
On the placement front, GDR flow appears to have resumed.

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Apr 15

Daily Brief Japan: Citizen Watch, Open House, Hisamitsu Pharmaceutical Co and more

In today’s briefing:

Citizen Watch (7762) : Super-Aggressive Buyback Likely Ending Soon – Beware of Risks Both Ways
Open House (3288-JP): Part 1
Hisamitsu Pharmaceutical (4530 JP): FY23 Result Ahead of Expectations; FY24 Guidance Initiated

Citizen Watch (7762) : Super-Aggressive Buyback Likely Ending Soon – Beware of Risks Both Ways

In mid-February 2023, Citizen Watch (7762 JP) announced another buyback. It had averaged nearly two small buybacks a year for the past four years for a total of ¥10bn.
This new one was ¥40bn, which assuming a 20% share price jump was 12% of ADV for a year. Bigly! We got the 20% jump, then not much more.
But Citizen has been buying fiercely. In the first 25 days of trading they averaged 25.8% of volume and bought back 11.5% of shares out. There’s a story here.

Open House (3288-JP): Part 1

By Guasty Winds

Open House (3288-JP) is a niche homebuilder in Japan that has a special expertise in building/selling cheap detached homes in urban cities.
It participates in many segments of the residential property market, though earns the lions share (~60-65%) of its profits from the single-family homes business.
Despite its relatively modest profile in the investment community, the company has a ~US$4bn capitalization. It trades at ~1.3x 2023e P/B and ~6.8x P/E.

Hisamitsu Pharmaceutical (4530 JP): FY23 Result Ahead of Expectations; FY24 Guidance Initiated

By Tina Banerjee

Hisamitsu Pharmaceutical Co (4530 JP) reported better-than-expected FY23 results, as OTC business revenue from the overseas market, specially Salonpas increased more than expected. OTC business contributed 54% of total revenue.
The company guided for FY24 revenue of ¥132B (+3% YoY), operating profit of ¥11.8B (+2% YoY), and net profit of ¥10.6B (-10% YoY). Dividend for FY24 is expected at ¥85/share.
With the resumption of outdoor events globally, Hisamitsu’s OTC business will be the main growth engine, going ahead. The company is on track to achieve 7th mid-term management plan target.

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Apr 14

Daily Brief Japan: Rakuten Bank, Seven & I Holdings, Adastria Co Ltd, Tokyo Stock Exchange Tokyo Price Index Topix, Kura Sushi Inc and more

In today’s briefing:

Rakuten Bank (5838 JP) – A Keenly Priced Quality Addition to the Global Neobanks Universe
Retail Ads: A New Revenue Stream for Seven & I and Rival Convenience Stores
Adastria Takes on Uniqlo and Muji with New Chain
As Human Capital Disclosures Increase, Expect to Find More Interesting Relationships for Investment
Five Days Later

Rakuten Bank (5838 JP) – A Keenly Priced Quality Addition to the Global Neobanks Universe

By Victor Galliano

Rakuten Bank’s IPO will add an attractively valued Japanese neobank to the globally listed neobank universe; furthermore, the Rakuten Group ecosystem is a powerful tool for customer acquisition and retention
On efficiency metrics, Rakuten Bank scores well versus its key domestic peers as well as global comparables; Rakuten Group companies act as a key conduit for new clients
At the announced issue price of ¥1,400, Rakuten Bank’s PBV ratio implies an attractive 25% discount to its core Japanese peer SBI Sumishin Net Bank, for similar ROE

Retail Ads: A New Revenue Stream for Seven & I and Rival Convenience Stores

Retail media in its traditional sense is nothing new, simply referring to the use of advertising in stores, but in modern terms retail media is something far, far bigger.
It is not only a trend in the US, but one that is about to explode in Japan – although in a very different format.
With purchase rates up two-fold in early experiments, the potential for brands advertising through retail stores will be significant with some estimates suggesting a ¥20 trillion market.

Adastria Takes on Uniqlo and Muji with New Chain

Adastria is on a roll, capturing more market share in both the core apparel market as well as through licensing (Forever 21) and home decoration and other lifestyle markets.
Until now, it has focused on slightly premium mass markets but a new chain will face Uniqlo and Muji head on in apparel basics.
It is also adding a new basics chain in home decoration and hoovering up contracts to supply apparel to chain stores.

As Human Capital Disclosures Increase, Expect to Find More Interesting Relationships for Investment

The items to be disclosed by 300 listed companies with active women are expected to be disclosed in the Human Capital section of the Sustainability section of Annual Securities Report.
Investors will now decide whether these disclosure items have an impact on their investment or whether they need to seek disclosure of further material factors.
In Metrical universe, the ratio of female executives is also useful for investment tips, as it has been found to have a significant positive correlation with ROA and Tobin’s q.

Five Days Later

By Investment Talk

The memo I shared about Kura Sushi five days ago had two conclusions.
The fundamentals of the business continue to endure and the company was going to have to raise cash fairly soon.
I noted that “I believe within the next 6-12 months, we may see Kura issue additional stock or tap into their credit line”.

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Apr 13

Daily Brief Japan: Fast Retailing, Shift Inc, Tokyo Stock Exchange Tokyo Price Index Topix and more

By Shifara Samsudeen, ACMA, CGMA

In today’s briefing:

Fast Retailing: Inflated Earnings Expectations & Stretched Multiples, A Cause for Concern
High Conviction Shift: Margins at Record High with Strict Management and Operational Improvement
A Shortcut to a Solution Is to Specify in Corporate Governance Code the ％ of Women to Be Promoted

Fast Retailing: Inflated Earnings Expectations & Stretched Multiples, A Cause for Concern

By Oshadhi Kumarasiri

Consensus FY+2 EBIT seems inflated by around 16%, driven by optimistic assumptions of recovery in China and growth in North America and Europe.
However, apparel demand in China was lower than expected, while wage hikes and a potential US recession could negatively impact profitability in the short-medium term.
As risks are skewed to the downside, we remain short Fast Retailing (9983 JP) leading up to 2QFY23 results.

High Conviction Shift: Margins at Record High with Strict Management and Operational Improvement

Shift Inc (3697 JP) reported 2QFY08/23 results on Monday. Revenue increased 34.7% YoY to ¥21.0bn (vs consensus ¥21.3bn vs guidance ¥21.1bn) while OP grew 74.8% YoY to ¥3.3bn (vs consensus ¥2.4bn).
Both GPM and OPM improved significantly reaching record highs as unprofitable projects came to an end with cost optimisation initiatives removing previous concerns over declined margins in 1QFY08/23.
Shift’s share price closed at ¥25,870 closing 15.8% higher than the previous close at the end of yesterday’s trading following its strong set of earnings.

A Shortcut to a Solution Is to Specify in Corporate Governance Code the ％ of Women to Be Promoted

Although women should be appointed to the board of executive directors to bring women’s perspectives into management, many companies actually only appoint a few women to “non-statutory executive officer” positions.
A survey shows that the percentage of women in management positions is about 10%, and even now there’re no signs of an increase in the number of female management executives.
Companies seem to be reluctant to act on their own to address the obstacles that prevent women from becoming board members as a social issue.

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Apr 12

Daily Brief Japan: Japan Post Holdings, CELSYS, Zenkoku Hosho, Tokyo Electron, Takara Bio Inc and more

In today’s briefing:

Japan’s Governance Changes I – The PBR 1.0 Target
TOPIX Inclusions: Who Is Ready (Apr 2023)
Zenkoku Hosho (7164) | The (Hibiki) Path to a Higher Share Price
Tokyo Electron (8035 JP): Recovery Likely to Be Slow
Takara Bio (4974 JP): Shrinking COVID-19 Testing Demand to Impact Near-Term Revenue Growth

Japan’s Governance Changes I – The PBR 1.0 Target

The TSE went through a multi-year period of planning a “Market Restructuring” which ended on 4 April 2022 as the TSE split into three Sections, TSE Prime, Standard, and Growth.
After that, the TSE formed a “Council of Experts” (some very senior people) that would follow up on the changes, and recommend new measures. In January, new rule proposals dropped.
There was talk of a hard end to the transition period. Also, the Council harped on Awareness of Capital Cost and Efficiency. Most notably, for companies with PBR < 1.

TOPIX Inclusions: Who Is Ready (Apr 2023)

By Janaghan Jeyakumar, CFA

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.
In the last two months, Amvis Holdings Inc (7071 JP), AXXZIA Inc (4936 JP), and Sosei Group (4565 JP) have confirmed their moves to the Prime Market.
These names appeared in our lists (A or B) of candidates with high “readiness” for TOPIX Inclusions in our recent insights.

Zenkoku Hosho (7164) | The (Hibiki) Path to a Higher Share Price

By Mark Chadwick

The share price has declined by 15% from its March high, perhaps on misplaced concerns about its HTM bond book and capitalization.
We have little concern about a collapse in the Japanese housing market and see little impact from higher defaults on capitalization.
We see a modest 19% downside if management continues to build up excess capital. Hibiki’s plan points to over 20% upside.

Tokyo Electron (8035 JP): Recovery Likely to Be Slow

By Scott Foster

Samsung is finally cutting semiconductor production while Micron makes further cuts to both production and capital spending.
Demand for Japanese semiconductor production equipment has stopped growing and the Japanese government plans to restrict exports in the months ahead.
An optimist would say that the bad news is now all in the price, but this is not good for Tokyo Electron (TEL) and its shares are not cheap.

Takara Bio (4974 JP): Shrinking COVID-19 Testing Demand to Impact Near-Term Revenue Growth

By Tina Banerjee

Takara Bio Inc (4974 JP) has raised FY23 revenue, operating profit, and net profit guidance by 1%, 5%, and 5%, respectively, due to better-than-anticipated sales of the COVID-19 testing-related reagents.
Takara Bio is heavily exposed to the COVID-19-related reagent revenue. However, the company is witnessing decline in general research reagent revenue in Japan.
With the shrinking demand for the COVID-19 testing and slower-than-expected recovery in general research reagent in Japan, revenue is expected to decline 25% YoY in FY24.

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Apr 11

Daily Brief Japan: Nippon Rietec, Trial Holdings, Seven & I Holdings, SmartRyde Inc and more

In today’s briefing:

TOPIX Big April Basket 23: 100% Hit Rate for High Conviction Basket; Focus on Surprises Next
Trial IPO to Drive Tech Innovation Targeting Convenience Stores
Seven & I: Earnings Peak and Valuation Multiples Nearing Breaking Point
Japan’s SmartRyde Raises $3.4m to Grow Airport Transfer Services

TOPIX Big April Basket 23: 100% Hit Rate for High Conviction Basket; Focus on Surprises Next

By Janaghan Jeyakumar, CFA

The TOPIX liquidity factor removal names (upweights) for April 2023 were announced after the close on Friday 7th April 2023 as expected.
According to the announcement, 22 names will see their Liquidity Factors removed and experience index inflows later this month.
Today was the first day of trading post-announcement and the 22 names gained +1.1% (+0.47% vs the TOPIX Index). I feel there could be more upside for some names.

Trial IPO to Drive Tech Innovation Targeting Convenience Stores