Japan

In today’s briefing:

Toyo Construction (1890 JP): Pot Shots and Warning Shots
Companies that Buy Back Their Own Shares but Do Not Increase Their Share Price Should Consider Why
Shizuoka – Indigestion
Terumo Corp (4543 JP): H1FY23 Results Reflect Continued Recovery from the Pandemic

Toyo Construction (1890 JP): Pot Shots and Warning Shots

By Arun George

YFO’s press release alleges the Toyo Construction (1890 JP) Board will not recommend the tender as YFO is not a suitable owner rather than the JPY,1000 price being too low.
The Board responded that YFO violated the NDA by disclosing the reasons for the Board’s disapproval. This damages the understanding between the parties, an essential precondition to recommending the offer.
The start of the tender has been pushed back to late January 2023. YFO is committed and will not withdraw the offer for any reason that shareholders may consider unreasonable.

Companies that Buy Back Their Own Shares but Do Not Increase Their Share Price Should Consider Why

Companies are presumably allocating cash to shareholder returns rather than investing in growth. Lack of investment in growth may lead to slower profit growth, which leads to lower valuations.
There is concern that management may be hesitant to take risks. Since no shareholder hates shareholder returns, they may be easily diverted to share repurchases that don’t require risk-taking decision.
Although the expected share repurchase will limit the risk of sharp decline in the stock prices, modest growth investments are likely to prevent the expansion of multiples.

Shizuoka – Indigestion

By Daniel Tabbush

Credit costs in September quarter are showing steep delta YoY and QoQ
Accelerated credit growth in past six months may mean there is more to come
Funding cost surge is keeping net interest income growth near zero despite swelling loans

Terumo Corp (4543 JP): H1FY23 Results Reflect Continued Recovery from the Pandemic

By Tina Banerjee

Terumo Corp (4543 JP) recorded double-digit revenue growth in H1FY23, with record-high Q2 revenue exceeding ¥200 billion. All three businesses of Terumo reported growth during H1FY23.
Cardiac and vascular segment remained the key growth driver and grew 21%, driven by a 24% y/y growth in overseas revenue amid the recovery and growth of medical demand.
Inflation and normalization of sales and marketing activities impacted the profitability of the company. To improve profitability Terumo has taken further price increase in second half.

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Dec 14

Daily Brief Japan: NTT Data Corp, Toyo Construction, Okk Corp, Seven & I Holdings, Omron Corp and more

In today’s briefing:

NTT Buying NTT Data Shares – ¥40bn to Go
Toyo (1890) Says “We Reject”. YFO Says “But We Didn’t Talk”. Medium-🌶🌶🌶 Hostile Activism To Ensue
Nidec (6594) To Take Over Nidec OKK (6205), Squeezing Out Minorities
2021 & 2022 High Conviction Review: Time’s Up For Seven & I But Japan Tobacco Has More Room to Run
Omron (6645) | Key Beneficiary of Industry 4.0

NTT Buying NTT Data Shares – ¥40bn to Go

NTT (Nippon Telegraph & Telephone) (9432 JP) and NTT Data Corp (9613 JP) did a deal earlier this year to sell NTT’s global data business to NTT Data. Discussed here.
NTT sold 55% of its current overseas business in NTT Communications, Dimension Data, and NTT Security Group, in return getting 45% of NTT Data’s current global business, plus ¥112bn.
NTT would then spend ¥100bn of the ¥112bn increasing its stake. So far it has spent ¥58.39bn buying 18% of volume every day since Oct 1.

Toyo (1890) Says “We Reject”. YFO Says “But We Didn’t Talk”. Medium-🌶🌶🌶 Hostile Activism To Ensue

In March, Toyo Construction (1890 JP) agreed to be bought out by INFRONEER Holdings (5076 JP) for ¥770/share. One activist objected, and bought 28%. They then said they’d pay ¥1,000.
The Infroneer deal failure started an acrimonious back and forth. The hostility lessened over the summer, but despite activist Yamauchi Family Office’s protestations of love, no deal as of November.
Today saw another press release, delaying things. The contents are 🌶🌶🌶. NOW things are getting more interesting. Hostility is back. Medium-spicy. Three 🌶 out of five.

Nidec (6594) To Take Over Nidec OKK (6205), Squeezing Out Minorities

Small machine tool maker OKK used to be good for about ¥2bn in EBITDA, then that dropped to the low ¥1bns on average, then the last two years were negative.
A year ago, Nidec agreed to inject capital and buy 66.6% of OKK – Now Nidec OKK – for peanuts. Yesterday, the two agreed a scrip merger on 1 March.
The process and ratio leave a LOT to be desired but they only need 66.67% and with 66.66% already, it’s a done deal. Nothing you can do about it.

2021 & 2022 High Conviction Review: Time’s Up For Seven & I But Japan Tobacco Has More Room to Run

By Oshadhi Kumarasiri

As the year draws to a close, we took time to assess the effectiveness of our high-conviction calls made during the past two years.
With further dividend hikes looking increasingly possible, our 2022 high-conviction call, Japan Tobacco (2914 JP) has more room to run this year.
However, it’s probably the right time to take profits from our 2021 high-conviction trade, Seven & I Holdings (3382 JP) as the US gas-stations profitability maxed-out in the last quarter.

Omron (6645) | Key Beneficiary of Industry 4.0

Omron is a structural growth stock that has fallen by 39% YTD reflecting near term risks to growth and margins
We believe that Omron is a major beneficiary of continued investment in automation and the shift to Industry 4.0
We analyse Omron’s core value drivers – revenue, margins, risk and reinvestment – and see 35% upside

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Dec 13

Daily Brief Japan: IHI Corp, Skymark Airlines, Daiei Kankyo, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

IHI (7013) | Boeing Orders Take Off
Skymark Airlines IPO Trading – Subscription Has Been Strong Despite Asking More than Peers
Daiei Kankyo IPO Trading – Peers Have Been Correcting
Is Effective Reform Only Possible After Future Problems with High-Risk Companies?

IHI (7013) | Boeing Orders Take Off

Boeing’s stock price is recovering sharply as it benefits from recent multi-billion-dollar order wins
Japanese stocks (IHI, MHI, KHI & Subaru) are highly geared into the Boeing supply chain
We highlight IHI as a top pick on this thematic and believe aero-engine revenues will continue to recover, driving a stock re-rating

Skymark Airlines IPO Trading – Subscription Has Been Strong Despite Asking More than Peers

By Clarence Chu

Skymark Airlines (9204 JP) raised US$242m in its Japan IPO. Skymark Airlines (SA) is a Japanese low-cost airline, being the third largest domestic airline according to the company.
SA began its operations in Japan as a domestic airline and gradually increased the number of routes offered to passengers. However, it has a mired history of bankruptcy.
In our previous notes, we looked at the company’s past performance and talked about valuations. In this note, we’ll talk about the trading dynamics.

Daiei Kankyo IPO Trading – Peers Have Been Correcting

By Sumeet Singh

Daiei Kankyo (9336 JP) , a waste management company, raised around US$314m in its Japan IPO.
Daiei Kankyo is involved in the waste management and related businesses in Japan. The core of its operations consists of its waste management and recycling business
In our previous notes, we looked at the company’s past performance and talked about valuations. In this note, we’ll talk about the trading dynamics.

Is Effective Reform Only Possible After Future Problems with High-Risk Companies?

Large audit firms focus on more profitable business and improving the profitability of their audit services. Consequently, high-risk firms that have been withdrawn from large firms flow to small-and-medium-sized firms.
“Enhancement of governance, including third-party evaluation function” is crucial to ensure that the audit firm has system to oversee and objectively determine the appropriateness of audit process and audit opinion.
Smaller audit firms will comply with the guidelines just for show, but only when future problems with high-risk firms arise will effective reforms be made in accordance with the guidelines.

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Dec 12

Daily Brief Japan: Tokyo Stock Exchange Tokyo Price Index Topix, Yokogawa Electric and more

In today’s briefing:

How Much Progress Has Been Made in Understanding the Concept of Shareholder Capitalism Since 1990s?
Yokogawa Electric (6841 JP): Carbon-Neutral Industrial Park & Green Hydrogen

How Much Progress Has Been Made in Understanding the Concept of Shareholder Capitalism Since 1990s?

Looking back at the genesis of the scandals that are still recurring, the cause has always been lack of awareness of legal compliance. When cross-shareholdings were prevalent, shareholders were underestimated.
How widespread has the understanding of the concept of shareholder capitalism, including the cost of capital, become? The starting point is that management must comply with legal compliance.
The problem is that the statutory auditors had the authority to function even though independent directors didn’t exist. Diversity is important to create a board of directors that can dissent.

Yokogawa Electric (6841 JP): Carbon-Neutral Industrial Park & Green Hydrogen

By Scott Foster

Yokogawa is diversifying with integrated controls systems for green hydrogen plants in the Netherlands and Australia and a carbon neutral industrial park in Japan.
Holland Hydrogen I, the YURI hydrogen project and the Goi and Soga Complex take the company beyond oil, gas and petrochemicals.
Based on long-term energy and environmental priorities, these projects should be immune to recession.

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Dec 11

Daily Brief Japan: Toshiba Corp, Softbank Group, Hamamatsu Photonics Kk and more

In today’s briefing:

Weekly Deals Digest (11 Dec) – Toshiba, Bigtincan, Nitro, Warrego, Xingda, VinFast, Weilong
Last Week in Event SPACE: JAFCO, Jardine Cycle, Softbank, Star Health
Hamamatsu Photonics (6965 JP): Earning Momentum Fading

Weekly Deals Digest (11 Dec) – Toshiba, Bigtincan, Nitro, Warrego, Xingda, VinFast, Weilong

By Arun George

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 – VinFast (1905332D VN) pre-markets a US$1bn IPO, I-Tail (ITC TB) and Sunshine Insurance (6963 HK) have tepid debuts, Weilong Delicious Global (WDG HK) launches a US$141m IPO.
Event-Driven developments – Bigtincan Holdings Ltd (BTH AU), Nitro Software Ltd (NTO AU), Warrego Energy (WGO AU), Xingda International (1899 HK), Chip Eng Seng Corp (CHIP SP).

Last Week in Event SPACE: JAFCO, Jardine Cycle, Softbank, Star Health

By David Blennerhassett

In principle, Jafco Co Ltd (8595 JP) still wants to be greenmailed to get Murakami-san out.
Jardine Cycle & Carriage (JCNC SP)i is expensive here – relative to historical values – and from an implied stub perspective. And the MSCI inclusion event has now passed.
If you think this is a “risk”, then you want to be long when the discount is wide and Softbank Group (9984 JP) is monetising assets in some way.

Hamamatsu Photonics (6965 JP): Earning Momentum Fading

By Scott Foster

As expected, FY Sep-22 results were ahead of guidance. Management is forecasting further growth this fiscal year, but guiding for a YoY decline in operating profit in 2H.
In addition, the depreciation of the yen, which added 5% to sales at 17% to operating profit last fiscal year, has reversed, economies have weakened and interest rates are up.
We continue to recommend profit taking. We would like to buy the shares at ¥6,000 – 15% down from the Dec. 9 close.

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Dec 10

Daily Brief Japan: Softbank Group, NTT (Nippon Telegraph & Telephone), Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Can Son-San Take Over Softbank Group Through Buybacks?
2023 High Conviction: NTT (Buy) – Surging DoCoMo Underappreciated as Markets Step Back from Value
Softbank Group – China Rebound Has Helped After End-Of-Buyback Hangover
Going Private Is an Option for Both the Companies and Investors

Can Son-San Take Over Softbank Group Through Buybacks?

On Thursday 8 December, an article showed up in Bloomberg suggesting Son-san had “increased his stake” as the company bought back shares, giving him more rights, “edging towards a buyout.”
That is a stretch. He went from below one-third to above one-third, giving him an explicit veto on shareholder super-majority resolutions, but it’s minor. He now has 34.2%.
The suggestion: if he got two-thirds, he could squeeze out minorities without a Tender Offer. Technically true, but not easy. I dig deeper and propose how it could be done.

2023 High Conviction: NTT (Buy) – Surging DoCoMo Underappreciated as Markets Step Back from Value

By Kirk Boodry

We have tweaked our numbers after Q2 results and catching up with the company. In particular, we come away with more confidence in wireless / fintech growth
NTT looks cheap at 11x FY22e EPS v 12x for KDDI even as relative growth is expected to be better with ~9% EPS growth
Shares have outperformed TOPIX (+18% YTD v -3%) and this should continue in 2023 as solid financial performance and an attractive shareholder returns story provide support

Softbank Group – China Rebound Has Helped After End-Of-Buyback Hangover

By Kirk Boodry

Alibaba is up 20% QTD and the public Vision Fund portfolio is on track for its first positive quarter in almost two years thanks to China upside, mostly for Didi
That has kept the share price elevated even as the discount to fair value has expanded since buybacks ended at Q2 results
At 34% now, there is room for the discount to expand further as the range before the buyback surge was generally closer to 40%

Going Private Is an Option for Both the Companies and Investors

While it’s natural for a rational investor to disagree with a company that cannot generate a return commensurate with the risk, the existence of cross-shareholdings in Japanese companies complicates matters.
The benefit of listing is raising capital on favorable terms by trading shares at a value greater than shareholders’ equity, but there are not many Japanese companies trading at premium.
Going private is one option for companies that are unable to find growth investment opportunities and accumulate cash on their balance sheets. In this regard, Japanese equities are of interest.

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Dec 09

Daily Brief Japan: Jafco Co Ltd, Food & Life and more

In today’s briefing:

JAFCO (8595) Cancels Tender Offer – I Offer a Modest Proposal For Good Governance
Food & Life: Can’t Avoid Headlines For Too Long & Starting to Fall Back Towards The Rest of The Pack

JAFCO (8595) Cancels Tender Offer – I Offer a Modest Proposal For Good Governance

Jafco Co Ltd (8595 JP) announced the reference period VWAP for the Tender Offer Buyback was ¥2,362.4136 vs target ¥2,525. Murakami-san refused to play, so the Tender Offer is cancelled.
This is good news and bad news. The announcement wording doesn’t make JAFCO look good, but they will continue discussions with City Index Eleventh. But there is potential.
I shall now therefore humbly propose my own thoughts, which I hope will not be liable to the least objection (Jonathan Swift, 1729)

Food & Life: Can’t Avoid Headlines For Too Long & Starting to Fall Back Towards The Rest of The Pack

By Oshadhi Kumarasiri

Food & Life (3563 JP), best known for its affordable conveyor belt Sushi restaurant chain Sushiro, is looking to break out after dropping more than 60% in the last year.
This breakout coincides with Sushiro’s overseas growth as the segment revenue and OP grew 27% and 108% QoQ respectively in the previous quarter.
Given its tendency hit the headlines, mostly for the wrong reasons, risks rewards aren’t that great. Multiples have downside potential with Sushiro’s profitability falling towards peers.

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Dec 08

Daily Brief Japan: Appier Group, Shimano Inc, Orix Corp and more

In today’s briefing:

TOPIX Inclusions: Who Is Ready (Dec 2022)
Shimano (7309) | Value Drivers in an Age of Sobriety
ORIX Has Responsibility to Explain Transformation of DHC into a Company that Respects Human Rights

TOPIX Inclusions: Who Is Ready (Dec 2022)

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.
This insight is a follow-up to TOPIX Inclusions: Who Is Ready (Oct 2022)
At present, there are 60 names that satisfy all of these conditions and there are more names that are close to being in that group.

Shimano (7309) | Value Drivers in an Age of Sobriety

Shimano’s stock has declined by 26% YTD reflecting concerns over an economic recession and sales normalization post pandemic
We believe that Shimano is a key beneficiary of government policy aimed at decarbonization
We analyse Shimano’s core value drivers and see at around 23% upside for the stock

ORIX Has Responsibility to Explain Transformation of DHC into a Company that Respects Human Rights

The difference is obvious when compared to Fancl’s case. While Fancl chose to form capital alliance with Kirin (less than 1/3 ownership), All DHC shares will be transferred to ORIX.
We believe that many of the buyer companies were concerned about the negative impact of consolidating DHC with Yoshida, who has repeatedly made discriminatory remarks.
ORIX is required to show the future management strategy of DHC, and ORIX is responsible for explaining the transformation of DHC into a company that respects human rights.

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Dec 07

Daily Brief Japan: Toshiba Corp, Fujitsu Ltd, Jafco Co Ltd, Nippon Prologis Reit, DeNA, Shiseido Company, Net Protections, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Toshiba (6502 JP): JIP’s Privatisation Bid Is Floundering
Fujitsu (6702) Buyback Just Getting Started
JAFCO (8595) Sells NRI Shares But VWAP Falling Short – Comes Down To Murakami-San
Nippon Prologis Placement – Although Only Minimally Accretive, Past Deals Have Performed Well
DeNA (2432) Buyback – Accretive on a Low Leverage Business Which Will Grow In Time
Shiseido: Outperforms With Relaxation Of China’s COVID Restrictions, Long Term We Are a Bit Cautious
Net Protections Holding IPO Lock-Up – PE Owner Is Free to Shed Its Remaining Stake
Not Which KPI Is Better, but What Is Shared Between Investors and Managers to Achieve the Same Goal

Toshiba (6502 JP): JIP’s Privatisation Bid Is Floundering

By Arun George

JIP, Toshiba Corp (6502 JP)‘s preferred bidder, is reported to be under pressure from co-investors to cut its offer price. Securing financing continues to be troublesome.
An offer valuing Toshiba less than JPY2.2 trillion would face pushback from the special committee, let alone shareholders. There are no signs of a JIC/Bain coming to the rescue.
While the Toshiba/peers price ratio remains undemanding compared to historical ratios, Toshiba looks expensive vs peers on multiples. With short-term newsflow likely to be incrementally negative, remain on the sidelines.

Fujitsu (6702) Buyback Just Getting Started

On 28 April 2022, with full-year earnings, Fujitsu Ltd (6702 JP) announced a buyback programme to buy back up to 12mm shares (6.11% of shares out) for up to ¥150bn
That was when the shares were ¥18,540. The shares popped 10% in 2 days. Then fell 25% into end-September. Yesterday, they announced they’d bought back 1.9mm shares in November.
Those were the first shares bought back under the Programme. And that leaves 4 months and a lot of stock to buy.

JAFCO (8595) Sells NRI Shares But VWAP Falling Short – Comes Down To Murakami-San

Late last month, JAFCO (8595) Yields to Murakami Greenmail – Big Asset Sale, Big Buyback and set the large buyback from Murakami-san to occur through a Tender Offer.
The TOB price would be set at a 1% discount to the average 30 Nov – 7 Dec VWAP if VWAP was between ¥2,525 and ¥2,828/share. That’s not happening.
So now we read the fine print, look at waive-ability of conditions, and look at contingencies.

Nippon Prologis Placement – Although Only Minimally Accretive, Past Deals Have Performed Well

By Clarence Chu

Nippon Prologis Reit (3283 JP) is looking to raise around US$175m in its global follow-on offering to acquire three logistics properties.
Acquisitions are well flagged, having been in the REIT’s pipeline for some time now. Past offerings have performed well in the first month as well.
In this note, we will talk about the deal dynamics and run the deal through our ECM framework.

DeNA (2432) Buyback – Accretive on a Low Leverage Business Which Will Grow In Time

DeNA (2432 JP) announced in June a buyback programme to buy up to ¥15bn of stock over the next nine months. They are two-thirds the way through.
At current pace, they should finish by end-Jan or early Feb, then cancel 8mm shares, leading to a small TOPIX selldown likely in March or April.
The company remains cash and securities rich (net cash, after-tax value of securities, and equity affiliates are 100% of market cap). And growth lines will slowly claw their way positive.

Shiseido: Outperforms With Relaxation Of China’s COVID Restrictions, Long Term We Are a Bit Cautious

By Oshadhi Kumarasiri

The indication that China is prepared to scrap its strict Zero-COVID policy has gotten Shiseido Company (4911 JP) going again after an earnings beat in Q3 saw shares climb almost 20%.
Given that the shares have been range bound throughout the COVID crisis, we think Shiseido could reach near the upper limit of the COVID-range in the near-term to around ¥8,000.
Nevertheless, we would approach this trade with caution and only with a short time horizon as we see a lot of downside risks in the medium to long term.

Net Protections Holding IPO Lock-Up – PE Owner Is Free to Shed Its Remaining Stake

By Sumeet Singh

Net Protections (7383 JP), a buy now pay later service provider, raised around US$570m via selling a mix of primary and secondary shares in its Japan IPO in Dec 2021.
As per Yano Research, it had 40% market share in the domestic BNPL market for B2C transactions.
In this note, we will talk about the upcoming lock-up expiry on 9th Dec 2022.

Not Which KPI Is Better, but What Is Shared Between Investors and Managers to Achieve the Same Goal

There is a gap between investors, who seek KPIs that reflect future cash flows and cost of capital to determine the prospects for corporate value, and the company.
Many companies aren’t able to manage investment and return by business, and under such conditions it is difficult to show future investments and growth prospects in a mid-term business plan.
Metrical’s analysis shows that simply increasing shareholder returns isn’t sufficient to raise market capitalization; growth policy and capital allocation policy must be systematically established as part of management policy.

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Dec 06

Daily Brief Japan: Nikkei 225, Nippon Prologis Reit, Daifuku Co Ltd, CEL Corp and more

In today’s briefing:

Nikkei the First to Crack
Nippon Prologis REIT (3283 JP): Offering Could Be a Catalyst for Outperformance Vs Peers
Daifuku (6383) | Attractive Valuation Drivers Despite near Term Risks
A Profitable Japanese Microcap Trading at a 53% Discount to NCAV.

Nikkei the First to Crack

By Thomas Schroeder

Japan has been a top long in Asia, the rising wedge had us reducing our long. Friday saw a pronounced RSI bear wedge break and price crack.
Japan faces rotation pressure into core Asia and will shift Japan into the bear camp on a muted recovery attempt.
Japan’s macro cycle remains trapped in a sideways range. Buy support near 26,000 and sell resistance near 29,000.

Nippon Prologis REIT (3283 JP): Offering Could Be a Catalyst for Outperformance Vs Peers

By Janaghan Jeyakumar, CFA

Japan’s largest logistics REIT Nippon Prologis Reit (3283 JP) (“NPR”) announced a US$170mn follow-on equity offering to fund their recent acquisition of three logistics facilities.
The primary offer quantity will be 76,570 units out of which 44,410 units and 32,160 units are expected to be allocated for domestic and international investors, respectively.
Below is 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.

Daifuku (6383) | Attractive Valuation Drivers Despite near Term Risks