Japan

• Didi shares jumped 24% on reports regulatory relief was at hand. That is good news for Softbank although the halo effect boosting Alibaba had more of a valuation impact
• Less noticed but also relevant as a potential outcome is the de-listing of Zhangmen Education which fell 50% Monday and is down 97% for VF in total
• Softbank shares trade at a 43% discount to fair value and remain range-bound.  Tech market sentiment remains the primary driver and we continue to be cautious

• This article updates NTT DATA by referring my earlier article although Hopes of NTT Data becoming a wholly owned subsidiary are far from fulfilled after the May 9th news conference.
• My previous article stated reorganization with NTT’s overseas operations is priority to strengthen NTT Data’s overseas business. NTT Data’s stock price is highly valued while NTT Data’s profitability is lacking.
• The timing of NTT Data becoming a wholly owned subsidiary will depend solely on how quickly the company can raise its profitability while it focuses more on domestic business.

• Not many retailers could boast sales growth of more than 50% last year, especially a retailer from the fashion sector.
• Pal Group’s 3Coins managed this thanks to the huge success of the discount fashion to home decor format.
• Its success is one more example of the growth in discount chains.

• Same-store sales were 1648.4% vs. May 2021 (208.7% for April), 684.1% vs. May 2020 (1979.9% for April), and 83.2% vs. May 2019 (77.2% for April)
• Note that both May 2021 and May 2020 were significantly affected by the emergency measures
• The number of holidays (weekends and holidays) was one day less than in May 2021 and May 2020, and two more than in May 2019

• Kyokuto Kaihatsu Kogyo Co (7226 JP) has always been cash-rich. Recently there are better noises. Sold real estate. New Mid-Term Plan. Raised the payout ratio to 50%. Slowly selling crossholdings.
• But it isn’t fast enough, and activist Strategic Capital this spring announced a flurry of AGM agenda items to extract value for shareholders. 
• The company today announced a buyback – additive, but there is a lot to look at here. Shareholder structure is key. And forward cash-flows tell you more buybacks could come.

• The days since Toshiba’s last briefing session have been eventful with METI expressing concern about foreign investor control and a split emerging in the board over director nominations. 
• These developments create significant risk of activist-friendly director candidates being vetoed in our view. 
• Toshiba stock has been trading in line with Hitachi’s strong performance of late despite being more expensive and thus risk has increased.

• Driven by a sharp rise in revenue and profitability over the last three quarters, Yonex Co Ltd (7906 JP) shares continue to go up in relatively choppy overall market conditions.
• We expect this strong growth momentum to continue over the medium term while Yonex builds popularity in new markets and new sports categories.
• We think there could be around 100% upside to Yonex alongside improving confidence about sustainability of Yonex’s current performance.

• The Nikkei Index team proposed several changes to the Nikkei 225 Average methodology last week. They include capping, a semi-annual (vs annual) review, and a change in “liquidity” measure.
• It helps move membership away from the low price low weight names which populate the bottom of the index. Slowly. 6 names a year. That’s not enough.
• And it doesn’t fix the historical anomalies rendering the index unsuitable as benchmark (and BOJ tool). I propose more changes below. You can submit this or yours in the consultation.

• Shimamura (8227 JP) is on a roll at the moment, clawing back share after a troubled few years of mis-merchandising and confused targeting.
• After a record year, Shimamura now thinks its merchandise teams are strong enough to take on urban centre consumers – without raising operating costs. This could be a worry for Uniqlo.
• Shimamura has tried this before but back then its focus was on young women and had weaker merchandising skills. This time around too urban consumers want more discount apparel.

• Over the past 2 years, customers cut back drastically on shopping and travel. Many worked in home offices in sweatpants and t-shirts.  
• But now, people are vaccinated, and lockdowns have lifted. Even Japan’s borders are starting to spring open.  
• Consumers are looking for ways to make up for lost time – we highlight 3 beneficiaries of revenge shopping. 

• Subaru’s profitability is set to improve dramatically, driven by a weaker yen
• After two painful years, production is starting to normalise post Covid
• At 1xPBR, we think Subaru is significantly undervalued and see at least 30% upside

• Topix inclusion could generate some solid domestic passive buying interest, but we think the fundamentals remain Bearish
• Mercari’s GMV growth in Japan is slowing sharply. We see higher promotional costs impacting margins as competition with PayPay Flea market heats up
• We think that street estimates are too high and we don’t see a reason why the stock should be trading at substantial premium to Z Holdings

• I would like to discuss the issues on the Nikkei article, “Discussions are underway to disclose human capital in annual securities reports in fiscal 2023.”
• It is good news for investors that the disclosure will be required in the legal documents. However, very few companies translate the document into English.
• Companies should include content that matches the company’s management policy. From the investor’s standpoint, it’s required to carefully analyze whether the disclosed information are consistent with the company’s actual actions.

• Eight proposals seem a lot for Toshiba Corp (6502 JP). However, if you are a PE fund on the radar of private equity LP investors, you have to get involved.
• The size of the trade is apparently 38 million shares. If you have been in the Woodside Petroleum (WPL AU) / Santos Ltd (STO AU) trade, take the deal, tactically.
• Perhaps a big pharma could make a splashy bid for Genting Bhd (GENT MK)‘sTauRx, but we’re not there yet.

• In mid-May 2022, Kito Corporation (6409 JP) announced KKR would launch a Tender Offer to buy out the company at a big premium. I warned about the register.
• Two large shareholders were there prior to the bid – one “engagement-style” activist and one private company in a similar industry. Both had a 9+% holding visible.
• Both have now lifted their stakes above 10% post-announcement, at a small spread to terms. This makes things more interesting.

• Sony’s State of Play today highlighted a variety of games headlined by Capcom’s Street Fighter 6 and Resident Evil 4 Remake and Square Enix’s Final Fantasy 16. 
• The title line-up was strong but the standout in our view was the degree of support Sony appears to be getting for PSVR2. 
• We had commented on this previously but it is increasingly looking like a key differentiating factor for PlayStation and no longer a gimmick.

• The bear market rally that we were on watch for started last week, confirmed by the bullish reversals on the DAX, Hang Seng, MSCI China (MCHI-US), and China Internet (KWEB-US).
• Is this just another bear market rally, or will indexes are able to make a higher low and start a new bull market? Either way, it’s a start.
• We highlight attractive stocks from a bottoms-up perspective, spanning several Sectors. Over half hail from Japan, where the TOPIX Small index is reversing its downtrend.

• We discuss a pair trade among the major Japanese trading companies. We propose going long on Marubeni Corp and going short on Itochu. 
• We believe Marubeni has one of the most attractive valuations among the five major Japanese trading companies in terms of ROE vs. P/B and Itochu is the least attractive.
• We like Marubeni’s strength in food and agri businesses. Itochu is more dependent on metals, minerals and energy sectors which tend to be more volatile. 

• Since Toshiba reported lacklustre earnings and guidance, there has been a steady flow of articles in the press about the privatisation process going on behind the scenes.
• On 25 March, Toshiba let it be known a privatisation process would start. On 31 March, Bain gave notice it would participate. Toshiba has been in talks since 21 April
• First round bids were due 30 May, and 10 total submissions were made, with 8 privatisation proposals proffered. Now we wait…

• Toshiba provided an update today on its management policy and the status of discussions with potential investors. 
• The management targets unveiled looked plausible but rather optimistic while the only real new information on the potential privatisation was that 8 bids had been submitted. 
• In the end the most interesting takeaway for us was that Toshiba Tec would play a key role in Toshiba’s data business.

• Preferred Networks is generally considered Japan’s leading AI and deep learning company with collaborations with numerous conglomerates across many industries. 
• The company offers significant gearing into labour saving technologies and could potentially become a global leader in AI over time. 
• In addition, it has demonstrated exceptional power efficiency with its deep learning technology which could prove a critical competitive advantage.

• I would like to discuss the points about the Nikkei article “Companies should do their best to prevent harmful effects of parent-subsidiary listings.”
• Recently, more and more companies are evaluating their businesses from the perspective of ROE and ROIC. This is thought to be gradually eliminating parent-subsidiary listings.
• Rather than hoping to eliminate parent-subsidiary listings by strengthening TSE rules, it’s more important to instill in companies a management philosophy on how to achieve long-term growth in corporate value.

• We expect high-end musical instruments to be one of the worse affected among consumer discretionary names during a high inflationary environment.
• Although Roland Corp (7944 JP) says that demand remains strong, the numbers such as revenue and backlog suggest weakening conditions.
• In addition, there’s a risk of a recession and it appears that Roland has not made sufficient progress in streamlining operations to maintain profitability in a low revenue environment.

• SmartNews is a news aggregation app using an advertising-based business model originally established in Japan in 2012 with an expansion into the US market in 2014. 
• The company is interesting in that it funds initiatives to improve the quality of investigative journalism and address problems arising from social media such as increasing polarisation. 
• However, what truly piques our interest is its demonstrated success in the US which remains unusual for Japanese software companies.

• Smart HR offers excellent growth potential with its ARR continuing to climb at a triple digit rate thanks to continuous feature improvements and integrations. 
• The company boasts extremely high customer loyalty and investors with a strong pedigree including Sequoia. 
• Perhaps the biggest risk here is deteriorating market sentiment as listed peers have seen prices roughly halve despite healthy growth and strong profitability.

• Same-store sales have been improving gradually on the back of the recovery of foot traffic, but still below the company’s target
• As the company has stores throughout Japan, there appears to be a mix of areas where the recovery has been progressing and areas where the recovery has been sluggish

• Since May 26, the company has been running aggressive promotions. We will watch closely to see if sales will recover in June.

• Although the company implemented price hikes on May 14, the guest count continues to be solid, which gives us a positive impression.
• All-store sales of 7.384bn yen (120.3% vs. April 2021) were the record high for a single month. The company said that in-store dining sales recovered in a significant manner.
• In May, the company opened two new stores (one company-owned store and one franchised store) and closed one store (one franchised store)

• While current conditions are likely to be tough for budget airline Skymark it will be a key beneficiary of reopening. 
• Without significant exposure to international business travel the airline could find favour with investors as a pure play on the reopening theme. 
• In addition, a weak yen could prove a tailwind for domestic companies looking to boost inbound tourism and Skymark could be a beneficiary here as well.

• Rakuten Bank has grown rapidly to become Japan’s largest online bank with a relatively young demographic focused on city centres, particularly Tokyo. 
• The COVID pandemic and government initiatives to accelerate Japan’s transition towards a more cashless society have helped drive growth. 
• However, the key long-term advantage remains its prominent position within the exceptionally strong Rakuten points ecosystem.

• Universal Studios Japan has suffered significantly from the COVID pandemic just as Oriental Land has. 
• However, as Japan reopens the company should benefit from a resurgence in tourist arrivals. 
• In addition, it could emerge as a key play on expanding the popularity of Japanese IP overseas.

• Fanuc’s share price is geared into the machine tool cycle. Unfortunately the cycle is rolling over
• Fanuc is also facing extreme margin pressure from rising parts and logistics costs
• We expect the share price to trade down 20% from here and bottom at around 2x book value

• Mercari Inc (4385 JP) was deleted from the MSCI Japan at the close today. Then the company announced that it would move to the Prime Market on 7 June.
• Transfer to Prime Market will require passive TPX INDEX trackers to buy stock end July and FTSE All-World trackers to buy in September – around 19% of free float together.
• Short interest is over 13% of free float. Some of the shorts would have covered against the passive MSCI selling today but the remaining shorts could look to cover.

• 4.5 months ago I wrote Mercari (4385) Applying for TSE Prime Means TOPIX Inclusion in 4-5 Months and today it was announced Mercari would move from TSE Growth to Prime.
• The move happens on 7 June, which means that the actual TOPIX inclusion will be at the close of 28 July. 
• This will change things near-term, and going forward. As always, we dig deeper below.

• The Nikkei 225 (NKY INDEX) market consultation released last week could lead to some tweaks to the index methodology and the stock selection process. Nothing really material enough though.
• Potential index inclusions in September are Renesas Electronics, Oriental Land and Pan Pacific International Holdings, while Toyobo Co Ltd, Nippon Light Metal and Oki Electric Industry are potential index deletions.
• Passive Nikkei 225 trackers will need to buy between 4-9% of the real float on the high/ medium probability names, while they need to buy between 2.5-14 days of ADV.

• Nissui Pharmaceutical (4550 JP) has been cheap for years. Years and years and years. 
• It has traded at negative Enterprise Value for almost all of the past year. 
• Now Shimadzu Corp (7701 JP) is taking it over and heavily indebted parent Nippon Suisan Kaisha (1332 JP) is letting it go.

• Fast Retailing (9983 JP)’s share price rose 10% towards the top end of the trend channel since reporting 15.8% YoY same-store sales growth in April 2022.
• However, the growth rate was influenced by weak comps and in April 2022 domestic revenue was 9% below the pre-pandemic level.
• Meanwhile, Uniqlo’s growth drivers are faltering with China’s revenue near pandemic lows and North America, Europe and Asia affected by rising inflation.

• TBM was established in 2011 and has developed “LIMEX” a composite material made from limestone which can be used as a substitute for paper and plastic. 
• The material benefits significantly from rising environmental awareness as it helps reduce the consumption of pulp, plastics and water as well as reducing transport costs. 
• With a wide variety of commercial partnerships and use cases LIMEX appears to offer significant expansion potential for TBM.

• TRIPLE-1 was established in 2016 and got its start designing highly power efficient ASICs used for cryptocurrency mining, partnering with TSMC to use its leading-edge nodes. 
• Since then the company has moved on to develop ASICs specialised in AI applications as well as for 5G base stations. 
• In all cases the company emphasises power efficiency and with significant gearing into local 5G networks the domestic focus could be a positive rather than a negative.

• GVE is a Fintech startup operating a CBDC or Central Bank Digital Currency platform in Japan that is compliant with IMF and BIS standards. 
• The company has a strong technological pedigree and numerous institutional links which could put it in pole position to cooperate on a CBDC for Japan. 
• Meanwhile, its business model appears somewhat centralised which could offer strong opportunities for monetisation but perhaps slow adoption.

• CAMPFIRE is Japan’s largest crowdfunding platform and also holds the number two spot in the country with a JV with PARCO. 
• The company has a strategy of adopting individual crowdfunding platforms according to specific use cases and this tailoring could prove to be a point of differentiation. 
• Crowdfunding could prove useful in unlocking the artisanal technological capabilities dormant within Japan and CAMPFIRE could be an interesting play on that though consistent red ink is a concern.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Kawasan Industri Jababeka
• Softbank Group

• Q1 cost pressures surprised the market but the share price has already discounted the news
• Underlying beer demand is solid as global economies recover from 2 years of Covid restrictions
• Improving sales mix and higher prices should offset the cost pressures. With Asahi trading at the bottom of its valuation range, our glass is half full on the stock

• JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents.
• A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. We look at the potential forward inclusions and removals every month.
• Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2022 based on trading data as of end-May 2022.

• I would like to discus the Nikkei article “J-Power is under increasing pressure from ‘activist investors’ who are pressuring the company to take ESG actions.”
• From the standpoint of investment managers, if there is management risk, they will not fulfill their fiduciary responsibility unless they take appropriate actions to eliminate that risk.
• From J-Power’s perspective, it is difficult to imagine the company making its own management decisions without METI’s consent, given its history of being established as a national policy company.

• The second tranche of the FFW methodology change for the Tokyo Stock Exchange Tokyo Price Index Topix (TPX INDEX) will be implemented at the close of trading today.
• One way flow is ~JPY 745bn and will be spread across ~2170 stocks. The largest inflow will be on NTT (9432 JP) and the largest outflow on Toyota Motor (7203).
• The stocks with the largest inflows have outperformed the stocks with the largest outflows over the last month and the outperformance could continue going into the last tranche in June.

• Japan’s reopening has started and pre-departure and on arrival tests for vaccinated tourists have also been abolished. 
• The beneficiary of this theme is less obvious for Japan Airport Terminal Co (9706 JP) while it is very obvious for Keisei Electric Railway Co (9009 JP) . 
• Japan Airport is trading at a PBR premium to Keisei while the former has a higher debt than the latter. 

• Life opened a new, upscale supermarket last month in central Tokyo that is designed to process online orders as easily as serving in-store customers.
• The new store, replacing Mitsukoshi in Ebisu Garden Place, includes a backroom that acts as a dark store for online orders.
• This frees up space in the store for higher margin items like deli foods and is a sign of the supermarket’s intentions going forward.

• Takashimaya will close its store in Tachikawa early next year.
• This can be seen as a further sign of an improving outlook for a smaller department store sector. 
• More closures will rid the sector of excess capacity and solidify positioning as a genuinely upscale format for the affluent.

• I will discuss the Nikkei article, “Shareholder proposals on ESG issues may increase in Japan, but the road to their passage will not be easy and should be watched closely.”
• Japanese asset management companies have begun to move toward ESG compliance. However, a survey conducted by FSA indicated that many asset management companies don’t have personnel specializing in ESG issues.
• The key to getting shareholder proposals on ESG passed or for a company to become more active in ESG initiatives is for foreign shareholder ratio to be in 30% range.

• Chinese lockdowns are taking their toll on Q2 sales. We expect the upcoming report to be much worse than the last 
• Estee Lauder’s recent results suggest that travel retail will be a negative shock too 
• We believe there is one large downgrade to full-year guidance and consensus numbers. Too early turn bullish