Japan

• Yesterday, Mori Trust Sogo Reit (8961 JP) (MTR) and Mori Trust Hotel Reit (3478 JP) (MTH) announced a merger to be effective 1 March 2023. MTR will be the survivor.
• The ratio is 1.00 : 0.92 MTR:MTH but MTR will conduct a 2:1 stock split on effective date to make it 1.00 : 1.84 to allow retail to continue holding.
• This will effectively increase the size of MTR by 35%, and re-distributes earnings structure. There will be index consequences.

• With just over two months left in the review period, we expect three changes to the Nikkei 225 (NKY INDEX) at the March rebalance.
• Lasertec Corp (6920 JP), Oriental Land (4661 JP) and Renesas Electronics (6723 JP) could replace Toyobo Co Ltd (3101 JP), Nippon Light Metal (5703 JP) and Toho Zinc (5707 JP).
• As with the last rebalance, there will be a large funding trade estimated at JPY 417bn. There are many stocks with over 0.5x ADV to sell.

• Although spending on non-necessities withered from March 2020 onwards, some low-cost retailers of discretionary items continued to grow. 
• Workman’s mix of high cost performance and engagement with the ever more active outdoor market has, and will, support expansion, even if same-store sales growth has slowed.
• Future category expansion will deliver higher same-store sales as well as top line growth. 1,500 stores (from 1,000) is certain but 2,000 is possible thanks to new categories like footwear.

• PHC Holdings (6523 JP) has revised mid-term plan for FY23–26, targeting revenue of ¥420 billion in FY26, representing 5.4% CAGR. CGM will be one of the key growth engines.
• During H1FY23, total revenue increased 3% y/y to ¥171 billion, mainly driven by a 3% growth in diabetes management business, which contributed 32% of total revenue.
• In response to the recent depreciation of the Japanese yen, PHC has raised FY23 revenue guidance to ¥358 billion (+5% y/y) from ¥350 billion earlier.

• Progress on ESG initiatives should be evaluated objectively. With insufficient transparency and disclosure of compensation, there is concern that incorporating ESG factors into compensation will further increase uncertainty.
• Leadership is required for management to seek the evolution of essential initiatives so that ESG efforts don’t fall into “numbers matching” and not be intimidated by temporary setbacks or modifications.
• There are the following unresolved issues: non-disclosure of individual director compensation, bias toward fixed compensation, opaque compensation formulas, and ensuring the independence of the Compensation Committee.

• Skymark Airlines (9204 JP) is looking to raise approximately US$218m in its upcoming Japan IPO.  
• Skymark Airlines (SA) is a Japanese low-cost airline, being the third largest domestic airline  according to the company. Unlike major airlines and other low-cost carriers, Skymark operates only domestic flights.
• In this note, we talk about the company’s past performance.

• Early disclosure of convocation notices and the use of electronic voting platforms, as specified in Corporate Governance Code, and electronic voting, which reduces the companies’ administrative burden, have also progressed.
• Although the provision of English-language convocation notices was included in the Corporate Governance Code, only a few companies still send all documents in English translation.
• More than 10 years after the regulatory-changes, few companies still file their annual securities reports prior to AGMs. Few companies take such a proactive approach by changing their company workflow.

• A year ago, TSE Growth-listed Medley (4480 JP) said they would “make preparations” for a listing on TSE Prime. Last month, Janaghan Jeyakumar, CFA had it at “Almost Ready.”
• Today they announced they would list on TSE Prime on 28 November which means a TOPIX Inclusion at end-December. 
• Shareholder structure and stock bias matter a lot in this case. It’s very much worth looking at the details.

• Just under two weeks ago, AXXZIA Inc (4936 JP) announced it had on that day (9 November) applied to move to TSE Prime from TSE Growth. 
• It’s an interesting one because of the strange differential between “tradable shares” and “float.”
• After some study, I think this could be a TOPIX inclusion at end-Feb 2023, but there are steps to take between now and then. 

• Sumco is a pure play wafer maker that is geared into demand for cutting edge 300mm wafers
• Sumco is attractive given weak sentiment towards tech, attractive valuation, strong profitability and long-term earnings drivers
• With the stock down 12% YTD, we believe the stocks is undervalued and see at least 20% upside from here

• Japan Post Bank continues to see cratering net interest income
• The company’s significant US CLO exposure is not supporting profit
• Total unrealized gains on securities are down 95% in the past six months

• This is our first report on global automobile behemoth, Honda Motors.
• The Shanghai lockdown and semiconductor supply shortage resulted in a drop in unit sales and automobile production of Honda in the quarter, mainly in North America and China.
• However, despite soaring raw material costs and a drop in automobile unit sales, the sales of motorcycle units were up which led to the revenue beat.

• Favorable industry trends like work from home and expanding mobile data usage are helping drive Arteria revenue growth
• Headline profits are down but core OP is up when one-time gains last year are stripped out and quarterly results will start to look better in H2 when fully lapped
• Management says macro concerns such as inflation and power costs are manageable and FY targets remain unchanged

• Daiei Kankyo (9336 JP) , a waste management company, aims to raise around US$280m 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 note, we looked at the company’s past performance. In this note, we undertake a peer comparison and talk about valuations.

• Following a couple of investor-activism campaigns against Toshiba Corp (6502 JP) and Fuji Soft Inc (9749 JP), Singapore-based Japan-focused activist investor, 3D-Investment-Partners seems to be turning its attention towards Sapporo.
• Earlier this month, 3D Investment Partners requested Sapporo’s outside directors to postpone the announcement of the new Medium Term Plan until they hear out opinions and new ideas from shareholders.
• We believe that there’s a chance that 3D Investment Partners could turn hostile as Sapporo Holdings (2501 JP) seems to be completely ignoring the activist investor’s requests and proposals.

• Alfresa Holdings (2784 JP) reported better-than-expected H1FY23 results, with sales growth of 3% to ¥1,332 billion, 2% ahead of guidance of ¥1,304 billion, mainly driven by pharmaceutical wholesaling business.
• With a revenue growth of 4.3% y/y, pharmaceutical wholesaling business outpaced the broad market growth of 2.7% and improved its market share to 23.3% at the end of H1FY23.
• The company has announced an interim dividend of ¥28 per share. Despite reporting encouraging H1FY23 performance, Alfresa has reiterated its FY23 guidance, implying accelerated growth in H2FY23.

• 72.9% of companies in prime market complied with the principles of Corporate Governance Code, which defines the concept of ensuring diversity, but no specific targets were set in their disclosures.
• If % female directors were raised to 30%, they should be recruited from within the company to executive directors, but very few companies have % female managers exceeding 30%.
• Gender discrimination in hiring, gender disparity in access to higher education, issues of leaving/returning to work due to childbirth and child rearing, and gender discrimination in workplace must be resolved.

• This is our first report on Japanese pharma major, Takeda Pharma.
• A significant pipeline milestone was achieved by the company when TAK-003, the dengue vaccine candidate of the company, received approval.
• Dr.

• Early predictions for the March 2023 Nikkei rebalance (TBA early Feb) are little changed. One way turnover would still be about 1.4%. I see 3 ADDs and 3 DELETEs.
• The 3 ADDs should be Oriental Land (4661), Renesas Electronics (6723), and Japan Airlines (9201).  The 3 DELETES Toho Zinc (5707), Toyobo (3101), and Nippon Light Metal (5703). 
• Oriental Land is the one to watch in March. The Sep 2023 rebalance and subsequent ones are smaller in size but more interesting in impact.

• Appier has been by far the best performing small-cap growth stock in Japan this year
• The company is gaining market share overseas, massively augmenting the Total Addressable Market
• It’s high growth, rising margins, and growing TAM makes this a top stock for SaaS investors

• Like Workman Co Ltd (7564 JP) and Honeys Holdings Co., Ltd. (2792 JP), Shimamura (8227 JP) has been a beneficiary of both household budget worries during Covid and inflation concerns since. 
• The apparel retailer has also worked hard to develop better cost performance ranges and more exciting marketing through collaborations with influencers, helping regain footfall levels.
• Shimamura has clearly regained momentum and looks set to continue to benefit from consumer fears over inflation and ongoing shifts in spending towards low-price retailers.

• FSA, which wanted to add Sustainability section, could reach a compromise with companies that wanted to eliminate quarterly disclosures, but but the discussion of the substantive issues took a backseat.
• Since it would be impossible for the supervisory authority not to take action in cases that may occur in future despite empirical evidence, FSA will impose some penalties for misstatements.
• Continuity of information is of utmost importance because if a company that has disclosed quarterly stops doing so, investment decisions will be affected by reduced information available for judging stock-valuation.

• In H1FY23, Kaken Pharmaceutical (4521 JP) reported 2% revenue decline to ¥36.8 billion, as the company’s key branded drugs, including Clenafin, Artz, and Seprafilm are recording decelerating sales.
• Newer drugs, including Ecclock, Regroth, and Hernicore reported revenue growth of 47.8%, 4.1%, and 4.1%, y/y, respectively. However, these three drugs contributed just 4% of total revenue.
• Lower revenue and higher operating expenses (+2% y/y) pulled down operating profit by 9% y/y to ¥8.2 billion. Operating margin decreased 170bps to 22.3%.

• MUFG aims to raise around US$255m via selling around 1% of Olympus Corp (7733 JP).
• The stock has been doing well recently and MUFG has sold before. Although, the recent earnings updates didn’t go down too well.
• In this note, we will run the deal through our ECM framework and comment on other deal dynamics.

• In February 2021 Nabtesco Corp (6268 JP) announced it would sell half of its stake in Harmonic Drive Systems (6324 JP) to concentrate on its own products and growth. 
• It was a not-very-well-held secret Nabtesco had invested wanting to own HDS. HDS didn’t want to be owned. Eventually Nabtesco gave up. So they sold over time into low float.
• Now they are letting go of the other half. Sale structure means ongoing pressure.

• Tokyo Electron (TEL) has cut sales guidance for 2H of FY Mar-23 by more than 25% and operating profit guidance by more than 50%. 
• Half of the reduction in sales guidance is due U.S. sanctions on China. Management does not expect demand to pick up until the second half of next year. 
• The share price has risen by more than 30% in the past five weeks after a slight decline in U.S. inflation. Projected valuations are not particularly attractive.

• Suzuken Co Ltd (9987 JP) last Friday announced earnings which beat expectations and raised forecasts well above consensus. But Implied H2 did not change, suggesting full-year is lowballed.
• The company announced a buyback over 5 months, but today (Tuesday) announced a ToSTNeT-3 buyback for the full size (6% or so) that morning. 
• It looks like insider selling, which in addition to being accretive would be bullish on a governance basis.

• By nature, management is expected to establish an organizational structure that ensures compliance with laws and regulations, and to put in place a management system to ensure such compliance. 
• This is a governance issue, but it goes beyond that. If a loose corporate culture permeates the company, it would have an impact on various areas, such as reduced competitiveness.
• Based on the analysis of Metrical Score, companies that have enhanced their corporate governance and performed stable earnings and high stock valuations would have minimized risk of falling into scandal.

• freee (4478 JP) reported 1QFY06/2023 results yesterday. Revenue increased 34.5% YoY to JPY4.24bn (vs consensus JPY4.18) driven by 23.5% YoY growth in paying customers to 386,655 from 313,206 in 1QFY06/2022.
• As expected, operating losses widened to 24.6% of revenue, however, reported losses of JPY1.0bn was well below consensus estimate of JPY1.6bn.
• Freee’s share price has moved up by about 5% following earnings announcement which shows that the market is confident over freee’s ability to turn around its profitability.

• Daiei Kankyo (9336 JP) (DK), a waste management company, aims to raise around US$280m 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 this note, we talk about the company’s past performance.

• Despite now being valued at ~$635 million (down ~32% from ATHs) Kura Sushi, the small-time restaurant operator with 40 stores across the United States, continues to boast an overzealous market valuation.
• Perhaps it’s their ability to consistently beat expectations. Perhaps it’s because they remain undercovered and somewhat illiquid for their size (the parent organisation owns a considerable amount of outstanding shares).
• I can’t be sure, nor do I really care. After reporting Q4 earnings last week, Kura rounded off the year in style, continuing to demonstrate a healthy recovery in demand for their service.

• Headline 2QFY22 results for Softbank Group were in the black, largely due to the Alibaba stake sale, but the group’s three funds registered an aggregate USD10bn of valuation losses
• FTX’s write-down to zero will cost Softbank’s Vision Fund 2 USD100m in 3Q22, our main concern is what the VC funding downturn means for portfolio valuations in the coming quarter
• The group’s NAV discount has now tightened meaningfully; we believe that this makes it less advantageous for management to announce another share buy-back programme

• Recruit Holdings (6098 JP) reported 2QFY03/2023 earnings today. Revenue increased 25.3% YoY to JPY878.4bn (vs consensus JPY842.7bn) while EBIT decreased 8.2% YoY to JPY108.5bn (vs consensus JPY116.1bn).
• HR Tech’s top line growth further slowed down to 40.2% YoY while adjusted EBITDA margin of the segment declined to 30.4% from 40.6% in the same period a year ago.
• The company’s 2QFY03/2023 earnings were better than we expected, however, it shows that the earnings growth is slowing down with weakening of labour markets globally.

• Machine Tool Orders in Japan decreased to 141 billion yen in October from 149 billion yen a year ago.
• The 5.4% decline marks the start of the third downturn in Machine Tool Orders over the past decade. 
• We analyse those downturns and believe that Fanuc’s stock price has probably hit bottom, but THIS TIME IS DIFFERENT

• With e-commerce and fintech segments performing reasonably well, Rakuten Inc (4755 JP)’s Q3 results were mostly in line with expectations.
• However, the Mobile segment failed to live up to expectations with the segment’s operating loss narrowing by just ¥3.4bn to ¥120.9bn in 3Q22.
• Nonetheless, we are excited about the prospects of Rakuten Mobile through the success of Rakuten Symphony as the business is close to signing 12 new corporate customers.

Softbank Group (SBG) has delivered acceptable Q2/22-23 results. Despite the large loss on investments, the company monetised an even greater amount of Alibaba shares to record a large quarterly net gain. As a result, the financial risk profile did not deteriorate. LTV was mostly stable q-o-q, improving since March 2022. Liquidity has strengthened, and now covers four years of planned bond redemptions.

The significant debt reduction and acceleration of share buybacks showed that SBG is trying to balance shareholders’ and creditors’ interests. In the past, SBG appeared more aligned towards shareholders’ interests, with frequent mentions of the share price’s discount to NAV, as well as large share purchases since 2016.