Japan

In today’s briefing:

Air Closet Files for IPO
Nidec (6594) | Q1 to Beat on Falling Raw Material Costs

Air Closet Files for IPO

By Michael Causton

Subscription rental services have become increasingly mainstream and the earlier start ups are now maturing into larger businesses. One of the first, Air Closet, plans an IPO later this month.
Air Closet specialises in renting out clothing from major labels but also in taking away the burden of choice by arranging for styles to be picked in-house.
As well as this growing service, Air Closet has also just launched a rental service for gadgets ranging from kitchen appliances to cameras.

Nidec (6594) | Q1 to Beat on Falling Raw Material Costs

Nidec share price has declined by 32% YTD on the temporary impact of inflation and lockdowns
We expect a Q1 beat (tomorrow) as lower raw material input costs and the weak yen boost operating profits
We are bullish on the stock at 31x forward earnings versus the 5-year average of 55x, especially as China accelerates policies to drive EV adoption

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Jul 18

Daily Brief Japan: Fast Retailing, IR Japan Holdings Ltd and more

In today’s briefing:

Fast Retailing: Guidance Upgraded, Yet The Upside Seems Limited Due to Stretched Valuations
Governance of Companies in Which the Founder Owns Majority of the Shares Should Also Be Discussed

Fast Retailing: Guidance Upgraded, Yet The Upside Seems Limited Due to Stretched Valuations

By Oshadhi Kumarasiri

With discounting delayed, Fast Retailing (9983 JP)’s 3QFY22 was a surprise to the upside as its OP grew 36.5% YoY to ¥81.8bn (consensus:¥65.8bn) to exceed the pre-COVID level by 9.7%.
Nevertheless, the upside seems limited in the short-term, with shares already trading at a stretched valuation of 22.2x consensus FY+2 OP, compared to the historical median of 15.5x.
At around ¥290.0bn FY+1 OP, a fair price should be somewhere around ¥58,000-60,000, which implies a downside of around 25%.

Governance of Companies in Which the Founder Owns Majority of the Shares Should Also Be Discussed

I hope that the investigation by SESC will lead to the establishment of compliance system for these IR vendors, although IR vendors have been left unchecked by insider trading regulations.
Apart from this issue, there is much room for discussion on the issue of governance for a company listed in which the founder owns more than 50% of the shares.
This is the same problem that occurs with parent-subsidiary listings. For increasing the listed companies, TSE has permitted the listing of companies in which the founder owns majority of shares.

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Jul 16

Daily Brief Japan: Baycurrent Consulting, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

BayCurrent (6532) | Jumping in Ahead of Earnings
No Causality Between Shareholder Proposal Withdrawal and Share Price, but Dialogue Is a Good Thing

BayCurrent (6532) | Jumping in Ahead of Earnings

The company will report Q1 earnings today. We think they will beat expectations
The stock has been a poor performer so far this year, despite profitable growth
BayCurrent is THE key beneficiary of Digital Transformation in Japan

No Causality Between Shareholder Proposal Withdrawal and Share Price, but Dialogue Is a Good Thing

I would like to discuss about the Nikkei article, “Shareholder Proposal ‘Withdrawn,’ Share Price Firm; Dialogue Leads to Compromise.”
Regarding “share prices of companies whose shareholder proposals are withdrawn are firm during sharp sell-off,” there seems little proof of causal relationship between withdrawal of shareholder proposals and stock performance.
Although Japanese corporate culture has tradition of doing everything without making a fuss, Japanese managers need to have serious discussion with shareholders on the balance between growth and shareholder returns.

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Jul 15

Daily Brief Japan: Yamazaki Baking, Recruit Holdings and more

In today’s briefing:

Yamazaki Baking (2212) | Price Hikes to Test Consumer Appetite
HRTech Sector Series: Changing HR Landscape Post-Covid Create Opportunities

Yamazaki Baking (2212) | Price Hikes to Test Consumer Appetite

By Shifara Samsudeen, ACMA, CGMA

Strong Q1 results have pushed up the share price offering a good entry point for Shorts
We think that full year guidance remains a risk given input costs and ability to push through higher prices
Given the risks, persistently low margins and returns to equity, we remain bearish

HRTech Sector Series: Changing HR Landscape Post-Covid Create Opportunities

The global HRTech market is forecast to grow at a CAGR of 5.8% between 2022-2028E to US$35.68bn driven by increased investment in product and technology development.
We have chosen four companies that will have an exciting year ahead (either bullish or bearish) and have discussed their business models, key drivers, fundamentals and their valuation.
We have chosen two stocks from the US (Ceridian and Automatic Data Processing) and two from Japan (Recruit and Visional) with a market capitalisation of >$1bn and ADTV>$1m.

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Jul 14

Daily Brief Japan: Softbank Group, Money Forward, Renesas Electronics, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Softbank Group – Fortress Sale Looks Better when Returns and Exchange Rate Considered
Money Forward (3994) | SaaS Crash Survivor
Money Forward – Q2 22 Results Reaction: Mixed Results Short of Consensus
Money Forward: Growth at the Cost of Profits
Renesas Electronics (6723 JP): Tie-Ups with Tata Group Add to Growth Potential
Skills Matrix Disclosures Give Us the Opportunity to See Through The “Sham Board, Disclosures”

Softbank Group – Fortress Sale Looks Better when Returns and Exchange Rate Considered

By Kirk Boodry

Softbank sale of Fortress removes an asset that is surplus to requirements at a price that is not as bad as headlines suggest
A sale to Mubadala at ~$1bn seems low versus the $3.3bn it paid in 2017 but dividend payments and a strong yen mean a c. 70% loss is actually ~10%
The discount has modestly narrowed recently but VF valuations likely to remain volatile whilst worries on China tech regulation persist

Money Forward (3994) | SaaS Crash Survivor

By Shifara Samsudeen, ACMA, CGMA

Money Forward has one of the largest SaaS/Fintech platforms in Japan and is a key beneficiary of corporate digital transformation
The stock has fallen 48% year to date as valuations crashed with global SaaS multiples
We think MF will emerge from downturn in good shape. At 10x EV/Rev, we see 22% upside (maybe even 55%….)

Money Forward – Q2 22 Results Reaction: Mixed Results Short of Consensus

By Kirk Boodry

Q2 financial results were in-line or better than management targets but lagged consensus expectations
Guidance for Q3 is slightly disappointing with the target range for revenue mostly below expectations whilst promotional and marketing spend continues to expand
The secular growth story is attractive and operating KPI growth remains robust but investors probably needed more from a stock that trades at 7.5x EV/FY22 rev in a risk-off environment

Money Forward: Growth at the Cost of Profits

Money Forward (3994 JP) reported 2QFY11/2022 results yesterday. Revenue grew 27.2% YoY to JPY5.08bn (vs consensus JPY5.13bn). Operating losses for the quarter was JPY2.2bn (vs consensus JPY1.9bn).
MF’s top line growth has been slowing down, and the company continues to spend heavily on advertising to acquire users for its SaaS business.
Though MF continues to grow its user base, it comes at the cost of profits.

Renesas Electronics (6723 JP): Tie-Ups with Tata Group Add to Growth Potential

By Scott Foster

Renesas and Tata Group companies have announced a new partnership in electronic systems and wireless telecom for automotive and other applications.
Specifically, they are working on the development of electric vehicles and industrial system solutions combining their semiconductor, IT system and manufacturing expertise.
This should provide a significant boost to their business in India and global markets. As Mio Kato wrote in late April, Renesas – Like We Said… Accelerating

Skills Matrix Disclosures Give Us the Opportunity to See Through The “Sham Board, Disclosures”

I would like to discuss about the Nikkei article, “More companies disclose skill matrix at June shareholder meetings.”
On the argument “it is unclear whether it will contribute to improve corporate governance,” the key is whether the company is building corporate governance with quality in rapidly changing days.
While it’s true that “the content of skill-matrix disclosure varies,” I expect that the process of selecting directors will be improved in the future as issues are clarified through disclosure.

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Jul 13

Daily Brief Japan: NTT (Nippon Telegraph & Telephone), Fast Retailing, Eisai Co Ltd, Lawson Inc, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

JAPAN PASSIVE: Who Owns What 2022?
Fast Retailing (9983) | Time to Ditch the Shorts
Eisai Co (4523 JP): Trying Another Luck for Alzheimer’s Disease; Strengthening Presence in Oncology
Lawson: Profitability to Expand with Slowing Growth Investments
Dissolution of Parent-Subsidiary Listing Is Just the Beginning for a Slow Decision-Making Company

JAPAN PASSIVE: Who Owns What 2022?

2022 Version of JAPAN PASSIVE: Who Owns What? where we break down the major (and minor) passive tracking indices and which category of investor owns how much of each.
Even if you do not “play” index changes, understanding impact is important. Japan Exchange Group (8697 JP) entered Nikkei 225 in July 2020 after rising 30%. That was the top.
Understanding the nature of the ownership and flows is crucial to understanding how to trade certain stocks.

Fast Retailing (9983) | Time to Ditch the Shorts

We turn bullish on Fast Retail as the current quarter marks the bottom for China sales
The company continues to surprise in its mastery of gross margins and operating costs
China is key, but the US is emerging as a new (and profitable) growth driver

Eisai Co (4523 JP): Trying Another Luck for Alzheimer’s Disease; Strengthening Presence in Oncology

By Tina Banerjee

Eisai Co Ltd (4523 JP) has been granted priority review by the FDA for its second Alzheimer’s disease drug candidate, lecanemab. Approval is expected in Q1 2023.
Lecanemab could become the first anti-amyloid antibody to obtain full approval for Alzheimer’s disease in the U.S. Eisai is aiming for submission of lecanemab in Japan and EU this fiscal.
Anticancer agent Lenvima is the largest selling drug of Eisai. Revenue from Lenvima increased 44% in FY22. The drug has taken top share in hepatocellular carcinoma market.

Lawson: Profitability to Expand with Slowing Growth Investments

By Oshadhi Kumarasiri

Lawson Inc (2651 JP)’s Q1 OP of ¥13.3bn (consensus: ¥10.6bn) seems to suggest that the company’s profitability is heading up following the upfront investments in store renovations.
After beating consensus OP by more than 25% in Q1, we think the company is being overly conservative by maintaining the OP guidance around ¥10.0bn below the pre-COVID level.
Based on the FY+1 OP to share price trend historically, our FY23 OP estimate of ¥63.0bn suggests that Lawson should trade at around ¥6,500 per-share, an upside of around 36%.

Dissolution of Parent-Subsidiary Listing Is Just the Beginning for a Slow Decision-Making Company

On June 1, the Nikkei Shimbun published an article titled “Shareholder Proposal to Toyo Suisan, Seeking Explanation of Parent-Subsidiary Listing. I would like to discuss the issues in the article.
Although some may have impression that this problem is on its way to being resolved due to dissolution of relatively large companies, in reality there are still many parent-subsidiary listings.
For companies that are slow to make management decisions, the dissolution of parent-subsidiary listings may be just the beginning, so the resolution of the parent-subsidiary listing issue has just begun.

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Jul 12

Daily Brief Japan: Chugai Pharmaceutical, Canon Inc, Mercari Inc, Kanemi Co Ltd and more

In today’s briefing:

TOPIX Rebalance: End-July Rebal Is $3.5bn One-Way – Some Big Sell Names
TOPIX July Rebalance: Mercari Inclusion, FFW Changes, US$6.5bn To Trade
Mercari (4385) – End-July TOPIX Inclusion Update
Pan Pacific (7532) To Up Stake in Kanemi (2669) Through Partial Tender

TOPIX Rebalance: End-July Rebal Is $3.5bn One-Way – Some Big Sell Names

The July-end TOPIX FFW Rebalance is larger than most expected, I believe.
There should be US$3.5bn one-way, with only a couple of major buy names.
Chugai Pharmaceutical (4519 JP), Canon Inc (7751 JP), Unicharm Corp (8113 JP), Kubota Corp (6326 JP), Asahi Group Holdings (2502 JP), and Shiseido (4911) are each US$170mm+ to sell.

TOPIX July Rebalance: Mercari Inclusion, FFW Changes, US$6.5bn To Trade

By Brian Freitas

Mercari Inc (4385 JP) will be added to the Tokyo Stock Exchange Tokyo Price Index Topix (TPX INDEX) at the close on 28 July.
There are a lot of FFW changes, mainly reductions. This leads to large funding inflows on the large index stocks.
We estimate the inclusion of Mercari and the FFW changes will lead to a one-way turnover of 0.56% leading to a one-way trade of JPY 442.23bn (US$3.25bn).

Mercari (4385) – End-July TOPIX Inclusion Update

In mid-January, I wrote about Mercari’s likely TOPIX inclusion 4-5 months later. 4.5mos later, it had been included (Mercari (4385) TOPIX Inclusion, Finally… And It’s Bigger Than It Looks) .
The publicly-visible announcement data often does not show TOPIX inclusion parameters. A little sleuthing gets you there.
It’s still bigger than it looks, but some large holders have recently been selling.

Pan Pacific (7532) To Up Stake in Kanemi (2669) Through Partial Tender

Pan Pacific International Holdings (7532 JP) has announced a Tender Offer on Kanemi Co Ltd (2669 JP) to buy out the remaining shares of its one-time co-owner, Familymart.
The Tender Offer is for 11.83% of shares (ex-Treasury) at a 3% discount to last. It will get PPIH to near 40%, but together with friendlies, they own ~70%.
There is a small but extraordinarily illiquid opportunity here. I’d avoid, but there is an interesting potential put option.

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Jul 11

Japan: Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Profit or ESG Should Not Be Prioritized, but ESG Should Be Aligned with Business Strategy

Profit or ESG Should Not Be Prioritized, but ESG Should Be Aligned with Business Strategy

I will discuss the Nikkei article, “The Ukraine crisis has triggered a conflict of interest between companies and the government, whose ESG values have become increasingly prevalent in business management.”
As far as this issue is concerned, a company’s management strategy is not made from the perspective of ESG, an area where some special values exist.
Management implements business strategies to maximize the company’s corporate value, sustainable growth, and shareholder returns over the long term. Needless to say, this objective includes ESG.

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Jul 10

Japan: Bank Of Iwate, Rakuten Inc, Paramount Bed Holdings Co Lt, Yaskawa Electric and more

In today’s briefing:

JAPAN ACTIVISM: Silchester AGM Effort Fails But Bank of Iwate (8345) Is Cheap As Chips
Last Week in Event SPACE: Chugoku Bank, Link Admin, Rakuten, Tassal, Pipedo
Paramount Bed (7817 JP): Record High Revenue Clocked in FY22; New Management Target Announced
Yaskawa Electric (6506) | Don’t Be Fooled by the “strong” Q1 Print

JAPAN ACTIVISM: Silchester AGM Effort Fails But Bank of Iwate (8345) Is Cheap As Chips

Silchester aimed at four mid-sized regional banks and one tiny one. All four efforts failed, but two of the four banks are probably worth looking at.
Bank Of Iwate (8345 JP) is the small one (tiny) worth looking at. It is 0.17x book, <7x earnings, 1.2x market cap in equity holdings, and better-than-average NIM.
Over time, value will out. And while not multi-bagger compelling, the mechanical value arithmetic is interesting.

Last Week in Event SPACE: Chugoku Bank, Link Admin, Rakuten, Tassal, Pipedo

By David Blennerhassett

Silchester’s effort to raise awareness in Chugoku Bank (8382 JP) failed. Still, if you had a basket of regional bank longs and shorts, Chugoku would be in the short basket.
Dye & Durham reloads a higher Offer after Link Administration (LNK AU)‘s rejection. This probably still needs a (small) bump in terms to get up.
Rakuten Inc (4755 JP)is trading at a significant discount to its SOTP. A part of its Fintech segment (Rakuten Bank) could be worth ~50% of total market cap.

Paramount Bed (7817 JP): Record High Revenue Clocked in FY22; New Management Target Announced

By Tina Banerjee

Paramount Bed Holdings Co Lt (7817 JP) announced record high sales in FY22, driven by strong demand of hospital beds and achieved management target two year ahead of plan.
While near-term challenges including high input cost and semiconductor supply shortage negatively impact FY23 performance, Paramount aims to achieve 33% revenue growth and 50bps operating margin expansion during FY22–27.
Paramount is a strong play on COVID recovery. The shares gained 15% since I published bullish note on the company on January 17, 2022. More stream is still left.

Yaskawa Electric (6506) | Don’t Be Fooled by the “strong” Q1 Print

Q1 OP +8%, but core OP (pre-adjustments) fell 18% YoY on significant decline in profitability
Bulls may point to the surprising strength in orders, but the boost from China re-opening and weaker yen are not reflective of the underlying outlook
We think Yaskawa will be hard-pressed to make full year guidance of ¥72b. Stay bearish for now

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Jul 09

Japan: Shiga Bank, Shift Inc, Z Holdings and more

In today’s briefing:

JAPAN ACTIVISM: Silchester Target Shiga Bank Dings the Div Proposal Badly
Shift 3Q: Earnings Below Consensus but Heavy Hiring Spend Should Help in the Long Run
Z Holdings (Neutral) – PayPay Rebranding of ECommerce; We Remain Cautious in a Rebuilding Year

JAPAN ACTIVISM: Silchester Target Shiga Bank Dings the Div Proposal Badly