Japan

• HK markets fell to 13-year lows as President Xi solidified his hold on power, raising concerns for private businesses that have already struggled with harsher regulation
• Softbank looks smart for its early settlement of Alibaba-linked derivative contracts in August as political worries have shares testing new lows
• But exposure remains with Alibaba’s 12% decline equal to $3.3bn (¥485bn) in lost value. Shares have rallied throughout October but China news appears to have stalled the move

• We expect strong Q2 results from TEL but full year earnings guidance is a risk
• WFE demand is deteriorating rapidly. Will TEL provide any thoughts on the 2023 outlook?
• We provide a scenario analysis for different WFE scenarios…the stock may have bottomed

• Positive impression of Q2 results: sales +28% YoY beat consensus, OP +16% in-line. 
• Near term headwinds for the precision motors and appliance businesses, but FX will significantly offset downside risk
• We remain bullish on the stock given solid progress in the e-Axle business. We see the division turning a profit next year

• Lowya is an online furniture brand run by Vega Corp that hit the headlines with 42% growth in 2020 while most other lifestyle retailers were reeling from the pandemic. 
• Sales fell last year post-Covid and won’t grow much this year either but Lowya wants to become a ¥60 billion business and looks a good bet for the long-term.
• Lowya will shift to a mall model similar to Zozo which should allow it to grow faster, while tie-ups with major retailers like Aeon should raise brand awareness fast.

• System-On-Chip designer and IP purveyor Socionext (6526 JP) is a recent IPO in Japan, born from a spinout of Fujitsu and Panasonic system LSI operations 7+ years ago.
• Having listed on TSE Prime from the outset, that means it gets TOPIX inclusion at the close of trading 29 November. 
• Inclusion Float is a bit nebulous. There is a chance we get official company data prior to the TSE announcement, in which case we know more by cob 31 October.

• We remain bullish on the stock price ahead of Q3 earnings
• We expect the company to surprise the market given stronger volumes and pricing trends
• If Toyota is having problems securing a stable supply of chips, we believe that industry inventories are much leaner than most believe

• Welcia Holdings (3141 JP) and Tsuruha Holdings (3391 JP), the country’s leading drugstore chains, are both looking to expand quickly in Kyushu after only entering the market recently. 
• This won’t be easy. Kyushu is full of discount retailers led by one of the best discounters, Cosmos Pharmaceutical (3349 JP), which is also a leading drugstore chain.
• But building a significant market share in the Kyushu market is crucial to competing nationally with these emerging discount leaders.

• Two months ago I wrote about a possible “Sustained Flow Event” on Japan Excellent (8987 JP). Since then, the stock has outperformed every other Office REIT. It’s up since then.
• Outperformance within Office REITs has been a minimum of 5.9%, and a maximum of ~17% vs the biggest peer, with an average and median outperformance of 10.8% and 9.2% respectively.
• There is no reason to think it won’t continue, but the Japan Excellent story is idiosyncratic.

• Toshiba (6502 JP) investors should look at process and understand the difference between this one and others. Some news is not news, other than telling you the dance has started.
• United Tractors (UNTR IJ) is cheap. It appears to be running at 6x 2022 earnings. This is not abnormal for a cyclical at the end of the cycle.
• Westpac Banking (WBC AU) confirms its interest in Tyro Payments (TYR AU), but still nothing firm.

• There are 45 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• I see no new deals discussed on Smartkarma this week.
• Key updates took place for Tyro (TYR AU), Shandong Fengxiang (9977 HK), Singapore Medical (SMG SP), Shinsei Bank (8303 JP), and True (TRUE TB) / Total Access Communication (DTAC TB).

• There is a discrepancy between the prime market concept and the listing criteria of 10 billion yen in tradable market capitalization.
• The most significant effect of the market restructuring was the elimination of parent-subsidiary listings, but companies are reluctant to discuss matters not explicitly addressed in the corporate governance code.
• Increasing market capitalization is not an overnight solution, but companies should study the initiatives advanced by companies that have increased valuations and implement those initiatives.

• Just eight months into Russia’s Ukraine invasion, Japan Tobacco (2914 JP)’s share price has moved back above the pre-Ukraine invasion level suggesting that investors are over with Russia exposure fears.
• Based on the company’s guidance upgrade trend historically and YTD financial performance, we are expecting around ¥70bn upside to 2022 OP guidance in 3Q22.
• With earnings back on a growth trajectory, we are expecting a reversal of the 2017-21 share price to earnings trend to take Japan Tobacco shares over ¥3,500 in the short-term.

• A week after JIP gets preferred status and we had rumoured bid prices, we now have an article saying JIC/Bain is still in it, and a new article today.
• Today’s “new” article says JIP’s bid price is what the first leak suggested, which is below ¥6,000/share. Other articles suggest bidders are finding that securing financing is tough. 
• Investors should look at process and understand the difference between this one and most others. It matters. Some news is not news, other than telling you the dance has started.

• Recruit Holdings (6098 JP) announced a buyback yesterday for a maximum of 42m (2.55% of total shares outstanding) shares for an aggregate of JPY150bn from the market.
• Recruit’s shares closed at JPY4,257 per share at the end of yesterday’s trading, and shares have moved up almost 5% during today’s trade following the buyback announcement.
• This is Recruit’s second buyback in 2022 where some of its shareholders reduced their stakes during the previous buyback (tender offer agreements) in January this year.

• We’ve been pessimistic on prospects for ARM and recent news flow and share price performance hasn’t helped but a decent report from TSMC eases some of our concerns
• Softbank needs high teens royalty revenue growth for ARM and TSMC as a bellwether (+30% for Q3 and Q4 guidance) is better than AMD or Nvidia
• We remain more conservative on valuation ($37bn) than Softbank assuming high single-digit growth and c. 43% EBITDA margins

• Sumitomo Dainippon Pharma Co (4506 JP) offered to acquire Myovant Sciences (MYOV US), which was rejected due to low valuation. The company is unlikely to revise its offer for Myovant.
• As Sumitomo’s in-house drug candidates are still in clinical stages, the company needs Myovant’s already marketed products to maintain its growth momentum post Latuda patent expiry.
• Sumitomo is not expected to sell its existing 52% stake in Myovant. This will ensure that Myovant’s marketed products Orgovyx and Myfembree should continue to remain as Sumitomo’s growth drivers.  

• It is useful for statutory documents disclosing a company’s medium-to-long-term management strategy to include information on “human capital,” which plays a role in sustainable growth.
• If the mandatory timing of the information to be disclosed in annual securities report is accelerated, there is risk that the information will be similar to that of other companies.
• The government should not stick to 2023 for the mandatory inclusion in annual securities reports, but should give companies time to encourage them to deepen what they include.

• In January 2022, Recruit Holdings (6098 JP) launched a Tender Offer buyback to buy back shares from NTT Data, Hakuhodo, and TBS. 
• Today, Recruit announced another buyback of up to 42mm shares (2.57% of shares out) spending up to ¥150bn, to go from now until 14 March 2023 (5mos).
• This time the buyback should have better traction and market impact, but it is not overwhelming, and the impact will likely lessen at higher share prices.

• Mitsubishi Estate Logistics (3481 JP) (MEL) is looking to raise US$145m from its primary follow-on offering to acquire eight properties.
• The offering is a large one, resulting in a 10.2% dilution, and would represent 34 days of three month ADV.
• In this note, we will look at the deal dynamics, and run the deal through our framework.

• Last Friday, small-cap logistics JREIT Mitsubishi Estate Logistics (3481 JP) (“MEL“) announced a follow-on equity offering to fund part of their recently-announced property acquisition. 
• The primary offer quantity is 51,000 units. In addition, there will also be an over-allotment quantity of 2,550 units. The total size of this offering could be roughly ¥23bn (~US$157mn). 
• 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.

• Revenue growth rebounded in Q4 and was the best in six quarters as corporate sales accelerated, particularly in the medium business segment
• But EBITDA losses accelerated and whilst management says this is the peak quarter, this is the first time since 2019 that EBITDA excluding advertising costs was negative
• Guidance for Q4 is mixed with a conservative revenue target and a only a modest reduction in EBITDA losses

• Money Forward Q3 sales rose +42% YoY to Y5.5bn driven by corporate ARR (+54% YoY)
• Net sales, ARR, and EBITDA loss of -Y1.9bn all in line with company guidance
• Growth investment starting to pay off as Corporate Client acquisition rate DOUBLES

• Money Forward reported 3QFY11/2022 results. Revenue increased 42.2% YoY to JPY5.45bn (vs consensus JPY5.40bn) while adjusted op.losses further widened to JPY2.5bn vs JPY449m in the same period a year ago.
• Though top line growth has resumed following a slowdown in 2QFY11/2022, MF’s margins have further worsened with increased investment in advertising, staff and subsidies.
• MF’s share price fell almost 8% following earnings announcement as investors are concerned over deteriorating profitability.

• Fast Retailing (9983 JP)’s 4QFY22 was yet again a surprise to the upside as revenue grew 23.2% YoY to ¥536.0bn while OP grew 24.3% YoY to ¥26.2bn.
• Having rallied close to 60% following an earnings beat in 3QFY22, we were bearish on the company expecting weak guidance for FY23, but the company surprised with optimistic FY23 guidance.
• With China struggling to maintain the historical growth momentum and North-America falling short of its medium-term plan, we anticipate downside to Fast Retailing’s FY23 guidance over the next 12 months.

• Kyushu-Based food services business and restaurant operator Plenus Co Ltd (9945 JP) announced Friday that its main holder had announced a Tender Offer. The Board voted to support the effort.
• The Tender Offer is at ¥2,640/share, a 37.5% premium to last, and which is just higher than the highest closing price since listing.
• This looks like a deal easy to get done. Decent premium, well above book, lifetime high on a low vol stock, not an awful multiple, and founder+cross-holders have 50%.

• The review period for the MSCI November SAIR starts this week and will run till 31 October. We also near the end of the review period for many local indices.
• AIPL has announced a S&P BSE SENSEX Index market consultation while FTSE has announced the result of the FTSE TWSE Taiwan Dividend+ Index market consultation.
• There were big weekly inflows to ETFs that track China, Taiwan, Korea and Hong Kong equities.

• In April, reportedly Renault (RNO FP) might sell Nissan (7201 JP) shares to support EV investments. We have news talks are coming to a head. The results won’t be pretty.
• The Nikkei says the JIP consortium is the “Preferred Bidder” for Toshiba Corp (6502 JP). That is a stalking horse. The proposed price of ¥2.5trn is also a stalking horse
• Reportedly the Widjaja Family may be looking to take Indonesian/Australian energy/met coal play Golden Energy & Resources (GER SP) private.

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. Softbank Group
2. Alam Sutera Realty
3. CIFI Holdings
4. Indika Energy
5. Hopson Development

and more…

• SBI Holdings (8473 JP)‘s unit SBI Regional Bank Holdings KK (SBI 地銀ホールディングス株式会社) today announced it had received FSA authorisation to turn the company into a Bank Holding Company.  
• There are some technicalities involved. SBI announced it would buy 2.5mm shares of Shinsei on-market to get to 50.05% by end-March 2023. This will disappoint some, but…
• I expect investors should continue to look at the big picture. Technicalities are technicalities. Strategy is strategy. The big picture is unchanged and there isn’t that much room to manoeuvre. 

• Socionext (6526 JP) raised around US$463m in its Japan IPO. The IPO consisted of 100% secondary shares.
• Socionext is a fabless semiconductor provider which commenced operations after integrating the system on a chip (SoC) businesses of Fujitsu Semiconductor Limited and Panasonic Holding Corporation.  
• In this note we will talk about the trading dynamics.

• Overnight, a few news outlets are running with the story that Toshiba Corp (6502 JP) has granted “preferred bidder” status to the Japan Industrial Partners (JIP)-led consortium bid.
• JIP had originally signed up with public-private fund JIC, forming one of the four bids (the other three being CVC, Bain, and Brookfield) but JIP and JIC split last month.
• “Preferred Bidder status” is just that. It’s not exclusive, but one can read between the lines. But the articles have interesting details, including the first trial ballon price leak.

• J. Front is a key beneficiary of improving consumption post-pandemic and a return of inbound tourism.
• Q2 sales rose 4.8% on the year. 2H sales guidance +2% YoY looks too conservative given full resumption of inbound tourism.
• We believe the stock still represents good value at 0.9x book value.

• Adastria’s growth has been sporadic in recent years as it adjusts to maturity and saturation in core apparel markets.It has diversification projects but these will take time to develop.
• It thinks it can find faster growth by franchising and licensing with already well-known brands, starting with Forever 21.
• It also has a new business providing apparel collections to General Merchandise Retailers, starting with Izumi.

• If discussion doesn’t proceed from the starting point that respect for rights should be for the coexistence of humankind, not for the maintenance of corporate activities, it will get confused.
• Although human rights were included in the 2021 revision of the Corporate Governance Code in the Principles of Sustainability, it is not thought to have been effective.
• The repeated human rights violation scandals at companies and the fact that these companies have human rights policies in place infers that this is a deeply rooted problem in society.

• As a follow-on to TOPIX October 2022 Rebal – BIG Names with BIG Flows which discussed ¥2.1trln a side flows overall, this insight analyses and proposes intra-sector baskets.
• In general, the sector-neutral BUYs vs SELLs baskets of all names where Index Shares change by 10% or more have seen BUYs sharply outperform SELLs in the past three weeks.
• Look for pre-positioning unwinds so trading BUY vs SELL baskets which have bucked the trend, banks and chemicals – might be worthwhile. Otherwise, pick your spots. Use the flow.

• Diversified across sectors and regions, Hitachi Ltd. is a proxy for the global economy going into recession.
• Restructuring nearly complete, but little margin expansion so far. DX revenues growing rapidly, but more profit supporter than driver. 
• Weak 1Q and worsening economic situation casts doubt on FY Mar-23 guidance.