Japan

• Canon Inc (7751 JP) announced a buyback on 5 August. That was its 17th ¥50bn buyback in 15 years. And its first “second buyback within a single year” since 2014.
• History suggests outperformance of Peers until the end of the buyback (and it has done well here), then underperformance post-buyback.
• Consensus forward EPS and EBIT ratios vs Peers suggest Canon shares have more to catch up, but some of that would involve reclaiming historical “quality premium.”

• The listing criteria regarding trading volume is much simpler than other criteria. It’s clear that an average daily trading value of 20 million yen isn’t sufficient liquidity for many investors.
• Many companies that fail to meet listing standards have low expectations for future cash flows, which leads to low valuations and is the reason for sluggish trading volume.
• Keeping these companies in prime market is expected to lead to more focus on this issue, as the gap between these companies and their exact opposites will widen further.

• The theme we have seen over the past four weeks is an increasing number of indexes reversing 4-10-month downtrends and/or breaking above important resistance levels, with no failed breakouts.
• We continue to believe that global equities are going through a bottoming process, but the real test will come during the eventual pullback, which we believe we are now experiencing.
• We are watching to see whether these breakout levels and important moving averages (e.g., 50-day MAs) will hold.

• Amvis Holdings Inc (7071 JP) is expected to have revenue CAGR of 57% and 600 basis points net profit margin improvement during FY18–23, driven by aggressive business expansion.
• Amvis plans to have 100 hospice facilities by 2025–2026 from 58 at the end of FY22. FCF is steadily improving, due to the high profitability of the business.
• With a float of 27.4%, Amvis is just maintaining the listing criterion on the Tokyo Stock Exchange’s Standard market. It has announced stock split, with record date of September 30.

• In February 2022, I discussed why Appier Group (4180 JP) could be an interesting TOPIX Inclusion Candidate in TOPIX Inclusion Pre-Event: Appier Group (4180 JP) 
• Earlier this month, I reiterated my view in TOPIX Inclusions: Who Is Ready (Aug 2022) identifying Appier Group as the best pick among all current TOPIX Inclusion candidates.
• Since my last insight, the share price has risen sharply and that has important implications for the company’s Prime market ambitions.

• NEC is geared into two mega-trends that will drive 9% CAGR in EBITDA through 2025 
• NEC is a beneficiary of DX (digital transformation) in Japan and global 5G, which are both just starting to take off 
• NEC Investment Day may be short-term catalyst, but it is the undervaluation relative to the long-term opportunity that is mispriced 

• Bain Capital Private Equity launched a deal for Net Marketing (6175 JP) at a 63% premium. 
• That should be enough to get it done on its own, despite coming below the IPO price of 5yrs ago. 
• In any case, Shareholder Structure makes this a completely done deal.

• Entities related to noted Japanese activist Murakami Yoshiaki have bought 11.5-15% of Jafco Co Ltd (8595 JP) in recent weeks; JAFCO has gotten upset and announced defensive measures.
• Murakami wants JAFCO to sell its large stake in Nomura Research Institute Ltd (4307 JP) and buy back shares. JAFCO is saving that stake for a rainy day.
• The shares have popped. There is a poison pill EGM Record Date coming. It’s worth thinking through the implications.

• Olympus Corp (7733 JP) reported double-digit revenue and operating profit growth in Q1FY23, thanks to favorable foreign exchange rate. Adjusting for FX, revenue was flat compared to year-ago period.
• Based on favorable foreign exchange rate, management has raised FY23 revenue and operating profit guidance by 5% and 12% to ¥1,019 billion and ¥231 billion, respectively.
• With more than 85% of total revenue coming from international markets, Olympus should remain a prime beneficiary of Japan’s weak currency.

• For the majority of companies applying the measures, the market capitalization in circulation is less than 10 billion yen, which is the reason for not meeting the listing criteria.
• The only solution to this problem is to raise the stock price, which can only be done either by improving profits or by raising the expectation on the future profits.
• It won’t be long before the time comes when the criteria will be questioned in the first place, whether tradable market capitalization of 10 billion yen is sufficiently liquid investment.

• As designed, the JPX-Nikkei400 Index is something of a disaster. It aims to be slightly ‘smart’ vs other cap-weighted indices like TOPIX, but tracking error vs TOPIX is de minimus.
• This year, in week 1, the ADD vs DELETE performance is positive. If we sector-hedge the ADDs vs DELETEs, it’s doing even better.
• This is probably due to relatively low pre-positioning, and cares. Momentum suggests one could be long ADDs vs DELETEs. And there is the perennial trade to watch out for.

• Nikkiso Co Ltd (6376 JP) announced an unusual buyback today. It is worth paying attention. 
• In March, Nikkiso announced the sale of a subsidiary to Atlas Copco AB (ATCOA SS), noting the sale proceeds would used to pay down debt (Debt/EBITDA in high single digits).
• The company today announced Q2 earnings, and a large buyback, which should be taken as a positive surprise given the debt load. 

• Freee reported 4Q and full-year FY06/2022 results. 4Q revenue increased 31.2% YoY to JPY3.87bn (vs consensus JPY3.9bn) while full-year revenue grew 40.2% YoY to JPY14.4bn beating own guidance by 0.2%.
• Operating losses decreased to 18.7% of total revenue from 32.5% of revenue in the same period a year ago. Full-year OP. losses were 15.7% of revenue vs guidance 17.1%.
• Improvement in profitability was driven by growth in ARPU from mid-and-large paying users.

• I would like to discuss the issues on several interesting points in the report “Vision for Future Human Resources” compiled by the Ministry of Economy, Trade and Industry (METI).
• Both company and employees have seen a gap between the skills they need and the reality, yet neither company nor employees have invested sufficiently. This has led to falling competitiveness.
• Companies need to invest sufficiently in human resources to create added value from management that has been so busy cutting costs that it has saved to invest in human resources.

• ARTERIA Networks Corp (4423 JP) posted Q1 22 results in line with expectations
• 7% revenue growth was the highest in five quarters whilst core segment growth was the best since 2019, supported by work from home demand and data volume growth
• Operating income is down YoY as it laps one-time gains a year ago – this has been well-flagged by management and consensus

• Recruit Holdings (6098 JP)  reported 1QFY03/2023 results on Friday. Revenue grew 26.8% YoY to JPY843.2bn (vs consensus JPY784bn) while OP increased 14.0% YoY to JPY119.3bn (vs consensus JPY106.1bn).
• HR Tech segment’s earnings growth has started decelerating with recruitment markets normalising while matching & solutions’ earnings have not yet recovered to pre-pandemic levels.
• We think there is further downside as global recruitment markets face more challenges with slowdown in economic growth and uncertain outlook.

• The stock price has rallied 40% since our last note. We are happy to take profit here, hence we label this insight as Bearish 
• The results and full year guidance hike were positive but largely currency assisted  
• We expect that a focus on China and Direct will drive margin expansion in the medium term

• BHP launched a bid for OZ Minerals (OZL AU). OZ has rejected it as being too low. BHP said the Offer provides certainty of funding growth. They are both right
• This Offer price for Lifestyle International Holdings (1212 HK) is probably sufficient to get up. It has been declared final for that reason. Optically $6/share was a more reasonable level.
• Nexon (3659 JP) announced another ¥100bn buyback over three years. However, the buyback is too small to pay back the Kim family inheritance tax obligations. 

• There is the problem that a wage gap exists between men and women even among regular employees, and that the percentage of non-regular workers is very high among women.
• Issues to be addressed include the creation of a social infrastructure in which workers don’t have to leave jobs due to childbirth or child-rearing, and fair wages for non-regular workers.
• Mandatory disclosure is an important step. Managers should also think of employees as partners in creating new value, rather than simply as labor, which will help to eliminate this issue.

• The biggest drawback of Rakuten Inc (4755 JP)’s share price momentum over the last few years was its Mobile business’ losses.
• However, based on Rakuten’s projections, the Mobile business could get close to breaking even by Q4 2023.
• With narrowing Mobile losses and outperforming E-commerce and Fintech, we think it is unreasonable for Rakuten to trade at a 40% discount to the bottom-end of the long-term trend channel.

• We are Bullish on Rorze, a global leader in ultra-clean wafer substrate handling solutions.
• We believe that Rorze is well placed to monetise the long-term growth in semiconductor demand and WFE spend
• The stock has recently underperformed its peer group and valuations collapsed. We see almost 100% upside potential based on a 14x target multiple

• Softbank Group’s fintech portfolio companies – and especially those in the largely Softbank-funded Vision Fund 2 – were a meaningful part of the group’s large loss in fiscal 1Q 2022
• However, Klarna and eToro “down rounds” – concluded in early July – do not seem to have been incorporated into June-end losses; the Vision Funds are absorbing the LatAm Fund
• Despite the public markets rebound, Softbank faces multiples challenges, and it is hard to find positives in the Alibaba derivatives contracts

• Japan Post Insurance (7181 JP) reported soft Q1 Tuesday on negative existing policy premium growth and higher (covid-related) underwriting claims costs. Guidance was unchanged but JPI also announced a buyback.
• The buyback structure is designed to keep Japan Post Holdings (6178 JP) under 50% to continue to abide by the strictures and goals of the Japan Postal Privatisation Act.
• 50% or more will be done in a ToSTNeT-3 buyback Thursday morning 12 August. The rest will be bought on market. Impact is non-negligible. And JPI is cheap cheap cheap.

• Toyo Corp (8151 JP) is a smallcap electronics firm specialising in sensors/testers/loggers for industrial and data system processes, large scale antennae systems, high tech medical equipment, remote sensing equipment, etc. 
• They have seen their (extraordinarily seasonal) revenues go mostly nowhere over the past ten years, but they have, until recently, accumulated cash and securities. 
• On 10 August, the company announced a LARGE buyback of up to 8.44% of shares out. The details suggest

• Tokyo Base rebounded in 2021 thanks to strong support at home and overseas for its Japan-made designs. 
• The fashion retailer plans to add new concepts as well as expand more quickly overseas.
• The Japanese fashion sector has taken a beating in the market but over the medium term there will be recovery for the better retailers, particularly those with potential overseas.

• In the area of politics, where there is a noticeable lag, there is a system in the electoral system that actually discourages aspiring politicians from becoming politicians.
• The social structure of male dominance is nothing more than maintenance of that structure by groups with vested interests, and risk exists that sensitivity to new values will be dulled.
• Without the forces at work to change existing social structures, the gender gap index isn’t expected to change much next year, but so far we don’t see such forces now.

• Softbank today confirmed that the stories circulating about Softbank having hedged a decent portion – 200+mm shares – of its BABA position were true. 
• The market expectation had been that these pre-paid forwards would be held for another two years. The announcement today is that they will be physically settled early. 
• This means the entire accounting effect – worth ¥4.6trln – will hit the income statement (and balance sheet) in the current quarter. There are investment and index implications

• Softbank will settle all of its forward derivative contracts on Alibaba by the end of September, representing 242mn ADRs. Some had years to run so this is truly surprising
• We estimate Softbank Group (9984 JP) raised $35b selling BABA-linked derivatives since mid-2020, which would imply average proceeds per ADR of $145 versus the $91 it trades at now
• But early settlement also has us wondering when the other show will drop and if that is related to global tech, China or Alibaba specifically 

• Today Shinoken Group (8909 JP) announced it was the subject of an MBO where the CEO-founder invited Integral – a local PE fund – to help him restructure and grow.
• It is at a 45% premium to last, and management negotiated the price from a relatively insulting initial bid of ¥1,300 to ¥1,600 in the end, but it’s still light.
• It is not hugely light, but it is not a full price. It could definitely be a bit higher. The question is whether active foreigners will push. 

• Canon Inc (7751 JP) has just started its 17th buyback in 15 years. Like the 16 before, this one is for ¥50bn. 
• The patterns/dynamics of the canon buybacks in the past are remarkable when compared to buybacks of other companies. 
• There are outperformance and under-performance patterns vs Peers, and it is worth taking note if you have a position to trade. 

• Kirin Holdings (2503 JP)’s 2Q22 normalized OP of ¥46.2bn from ¥500.3bn revenue was slightly above the consensus OP of ¥45.9bn from ¥500.8bn revenue.
• Kirin raised its 2022 revenue and normalized OP guidance by ¥40.0bn and ¥6.0bn respectively, due to the progress of profit improvement measures mainly in Coke-Northeast and Kyowa Kirin in 1H22.
• Meanwhile, Kirin is due ¥22.4bn from MEHL for the Myanmar JV. Even though this is not the fair value, receiving at least something is a bonus in our opinion.

• Toshiba reported 1Q results today missing at both the revenue and OP lines. 
• While revenue was barely above consensus the company generate a ¥4.8bn operating loss rather than the ¥22bn OP consensus was projecting. 
• 1Q is seasonally weak so the loss itself would not be concerning except for how widespread deterioration was.

• Mobile losses narrowed sequentially as expected but not by much as the company missed consensus and Redex expectations for profitability
• Rakuten also reported a 220K net subscriber loss in the quarter as point-chasing free users churned off when zero-yen tiers were cancelled but worringly, network coverage/capacity was also a factor
• If there is a silver lining, fintech businesses Rakuten Bank and Securities posted solid results and remain on pace to IPO but negative mobile sentiment is unlikely to change

• Denso started the fiscal year with an overly optimistic view of Toyota production – it is now too bearish 
• Chip shortages and supply disruptions are starting to ease, making it easier for automakers to meet end demand 
• We are bullish on the stock as we believe that Denso’s earnings will beat lowered guidance and valuations are at the bottom of the range 

• Nexon (3659 JP) reported Q2 earnings and Q3 forecasts today. Everything is generally “in-line” to tilting slightly light. But USD/yen volatility matters a lot. 
• The company announced a small dividend hike, from largely meaningless to ever-so-slightly less meaningless. And a plan to buy back ¥100bn of shares over 3 years. 
• The inheritance tax issue remains a big one, but overhang appears delayed and buyback accretion is small, and also appears delated. And there’s an index sell at end-September.

• A sudden decline in sales led to a 30% sequential decline in operating profit in the three months to June. Year-on-year, operating profit was down 17%.
• Nevertheless, management left sales and profit guidance unchanged – despite cutting their semiconductor equipment demand forecast – and R&D and capital spending continue to rise. 
• FY Mar-23 EPS guidance puts the shares on 13x earnings, but potential downside risk is considerable. Stand back while the economic recession unfolds.

In our view, Softbank Group’s (SBG) Q1/22-23 results were dismal, with the company reporting a record loss. This was the second consecutive quarterly loss, after SBG registered a big loss just three months ago. One positive factor is liquidity, with the company holding a large amount of cash after heavily monetising its liquid assets (mostly Alibaba shares) during the quarter.

The improvement in LTV despite the steep drop in NAV signals that the ratio, as defined and reported by SBG, is open to the company’s control and manipulation. SBG still has a lot of room to monetise its asset base (JPY 4.5 tn in Alibaba shares and JPY 1.2 tn in T-Mobile/Deutsche Telekom shares). Thus, LTV is no longer meaningful, as the company appears to be able to manipulate the ratio as it wishes, as long as it has liquid assets.

• Kaken Pharmaceutical (4521 JP) is reporting declining revenue from its three largest selling products, due to NHI price revision. These products together contribute more than 60% of total revenue.
• The company’s newly launched products are growing at a rapid pace. However, the fastest growing product Ecclock contribute just 2% of total revenue.
• Kaken guided for just 1% y/y revenue growth and 12% y/y decline in operating profit in FY23. Due to pipeline expansion, R&D expenses are likely to remain elevated.

• As discussed in my previous article, when the % of foreign shareholders increases, companies tend not to bring up the continuation of takeover defense measures at shareholder meetings.
• The threshold level, so to speak, of the % of foreign shareholders that determines whether or not to continue takeover defense measures is estimated to be in the 30% range.
• If other domestic institutional investors follow, threshold level will be lowered and lead to a more tense corporate management, which will have a positive effect on the board of directors.