Japan

In today’s briefing:

Last Week in Event SPACE: BHP, Bank of Kyoto, Incitec Pivot, Yancoal, Virtus
Index Rebalance & ETF Flow Recap: FTSE AW/AC, KOSPI2, KQ150, EPRA, China 50/A50, ASX, STAR50, SSE50

Last Week in Event SPACE: BHP, Bank of Kyoto, Incitec Pivot, Yancoal, Virtus

By David Blennerhassett

Post-Spin, BHP (BHP AU) should look more like RIO. It’s not clear it does, but it does move around in a way that allows one to harvest ratio noise.
Bank of Kyoto (8369 JP) has been the poster child for “deep value” Japan traders and occasional wannabe activists. It has a huge equity portfolio which dwarfs market cap.
Fourteen years after its acquisition, Incitec Pivot (IPL AU) plans to demerge Dyno Nobel from its fertilizer ops. The split has been a long time coming.

Index Rebalance & ETF Flow Recap: FTSE AW/AC, KOSPI2, KQ150, EPRA, China 50/A50, ASX, STAR50, SSE50

By Brian Freitas

Early last week was the review cutoff for the FTSE country indices and the EPRA Nareit, while the changes to the CSI300 and STAR50 indices were announced on Friday.
Monday will see tranche 2 of the TPX INDEX FFW changes implemented, while Tuesday is MSCI implementation day and a bunch of review cutoffs.
There were large inflows to the IShares Edge MSCI Min Vol Emerging Markets ETF (EEMV US) and outflows from the iShares MSCI EM ESG Optimized (ESGE US) ETF.

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May 28

Japan: Toshiba Corp and more

In today’s briefing:

Still Bearish, But On Watch for Bear Market Rally; Buying Toshiba 6502-JP, Defensive Sectors

Still Bearish, But On Watch for Bear Market Rally; Buying Toshiba 6502-JP, Defensive Sectors

By Joe Jasper

The DAX and Hang Seng are reversing their downtrends while MSCI China (MCHI-US) and China Internet (KWEB-US) are currently testing their respective multi-month downtrends.
Reversals of these downtrends would signal a bear market rally in progress.
We will need to see more basing, followed by base breakouts, in order to get bullish — a process that would likely take weeks or months.

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May 27

Japan: Renesas Electronics, Sony Corp, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Nikkei 225 Methodology Change. Again. This Time Better But Still Not Good Enough
Sony (6758 JP) | Master of the Metaverse
Sony – IR Day One and Kadokawa
About an Article on TSE Prime Market

Nikkei 225 Methodology Change. Again. This Time Better But Still Not Good Enough

The Nikkei Index Team has suggested a methodology change to the Nikkei 225 Average.
It involves capping stocks, creating a method for re-weighting once capped then stocks fall, and they recommend changing to a semi-annual Periodic Review – twice a year rather than once.
More interestingly, they also change the “High Liquidity” definition to be related to traded value not volume, which starts to favour higher-market cap stocks with more shares out.

Sony (6758 JP) | Master of the Metaverse

By Mark Chadwick

Sony’s hosted its 2022 Corporate Strategy Meeting last week. Our key takeaway is that SONY is shifting towards greater investment in Content, Creators, and Communities.
Sony recognizes that technology is changing the way that content is produced and consumed and is responding with new experiences and monetization models.
Sony will continue to benefit from the evolution of the internet as it becomes more social, immersive and financialized (otherwise known as the metaverse).

Sony – IR Day One and Kadokawa

By Mio Kato

Sony held the first of their two investor days yesterday presenting on the Game & Network Services, Music and Pictures segments.
While there was nothing especially new for those paying attention to the broad flow of news conditions for the content businesses remain strong.
What was interesting to us was the degree of collaboration with Kadokawa.

About an Article on TSE Prime Market

I will discuss the Nikkei article that “companies that don’t meet the prime market listing criteria but remain in the prime market under transitional measures should increase their corporate value.”
It goes without saying that increasing corporate value is the way to increase market capitalization. However, whether the company’s methodology is reasonable in the “plan” should be fully discussed.
TSE should proceed with discussions to expand the market to high quality companies that will regain profitability and growth potential, without limiting it to companies to which transitional measures apply.

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May 26

Japan: Tsuruha Holdings, Bank of Kyoto, Tokyo Stock Exchange Tokyo Price Index Topix, Otsuka Holdings, Fast Fitness Japan Inc and more

In today’s briefing:

MSCI Japan Index Rebalance: Short Build Up Continues as We Near Implementation Day
Bank of Kyoto (8369) Surprises With a Cross-Holding Sale Plan (Albeit Small)
About an Article on TSE Reorganization
Otsuka Holdings (4578 JP) 1Q22: Global Products Continued Double-Digit Revenue Growth
Fast Fitness Japan (7092): Confusion over Election of Directors

MSCI Japan Index Rebalance: Short Build Up Continues as We Near Implementation Day

By Brian Freitas

There are 22 deletions for the MSCI Japan Index at the May SAIR. The changes were expected and there was large short buildup prior to announcement of the changes.
Shorts have continued to increase to increase over the last week and there could be a reversal over the next few days as shorts start to cover.
Buying the deletions in the next few days and hedging with Tokyo Stock Exchange Tokyo Price Index Topix (TPX INDEX) futures could provide superior risk adjusted returns.

Bank of Kyoto (8369) Surprises With a Cross-Holding Sale Plan (Albeit Small)

Bank of Kyoto (8369 JP) has been the poster child for “deep value” Japan traders and occasional wannabe activists. It has a huge equity portfolio which dwarfs market cap.
Every year, twice a year (end of May and early December) Bank of Kyoto (8369 JP) releases a document for a meeting with analysts and press called Information Meeting.
This year’s is a little different in that it proposes sales of 10% of its equity portfolio. It’s “small” but worth thinking about.

About an Article on TSE Reorganization

I discussed the points of the Nikkei article on the prime market created by the TSE’s market reorganization.
Looking at the prime market as a whole, it is not significantly different from the TSE 1st Section. However, there were aspects where individual companies made progress in their efforts.
Since prime market has companies with small market capitalizations and depressed valuations, it is desirable to discuss increasing the quality companies that enhance profitability, growth potential and corporate governance.

Otsuka Holdings (4578 JP) 1Q22: Global Products Continued Double-Digit Revenue Growth

By Tina Banerjee

Otsuka Holdings (4578 JP) started 2022 on a strong note, with 13% y/y revenue growth in Q1. Growth was driven by four global products, which contributed 36% of total revenue.
Otsuka has terminated its global license agreements with Akebia Therapeutics related to vadadustat for the treatment of renal anemia and recorded an impairment loss of ¥24 billion.
Despite the impairment losses related to vadadustat, Otsuka reiterated 2022 guidance and expects double-digit growth in operating and net profits.

Fast Fitness Japan (7092): Confusion over Election of Directors

By Mita Securities

Fast Fitness Japan announced that 1) on April 25, it had received a letter from three of its major shareholders jointly proposing the election of directors and 2) on May 23, the company’s board of directors decided to oppose the shareholder proposal
The shareholder proposal was submitted in response to the board’s April 14 decision regarding director candidates
Despite the company’s solid fundamentals, such disruption in the governing structure could be an additional risk factor for the stock price in the near term

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May 25

Japan: Ichigo Inc, Toyo Construction, Rakuten Inc, ARTERIA Networks Corp, Ibiden Co Ltd and more

In today’s briefing:

FTSE EPRA Nareit Developed Asia Preview: Adds, Close Adds & Misses for June
Toyo Construction Comes Out Fighting Against YFO, But Sincerely.
Rakuten (Neutral) – Follow-Up on Q1 Results and Thoughts on a Securities Listing
Arteria Networks (Buy) – Q4 21 Results Reaction: Between a Rock and a Hard Place
Ibiden (4062 JP): Guidance Looks Too High, but Dropping Toward an Entry Point

FTSE EPRA Nareit Developed Asia Preview: Adds, Close Adds & Misses for June

By Brian Freitas

The FTSE EPRA Nareit Index June rebalance will use data from 23 May. The changes will be announced on 1 June and implemented at the close on 17 June.
Potential inclusions at the review include Ichigo Inc (2337 JP) and LOTTE Reit Co Ltd (330590 KS) while there is a possibility of Digital Core REIT (DCREIT SP) being added.
Mapletree North Asia Commercial Trust‘s NPI from Developed Markets is 72% making it ineligible for index inclusion, while Frasers Hospitality Trust‘s drop has taken it out of the inclusion list.

Toyo Construction Comes Out Fighting Against YFO, But Sincerely.

As discussed in the last insight, there was the possibility that YFO was jumping the gun. From the near 100+ pages released by Toyo Construction (1890 JP) today, they did.
TC accused YFO of being “dishonest” in its attitude and actions, from the “reasons” stated in its Large Shareholder Report and market purchases to YFO’s Murakami-san’s previous interactions.
What TC doesn’t yet understand is that when a company is in play, if a “market check” comes in, that’s OK. Investors are not hurt by a higher bid.

Rakuten (Neutral) – Follow-Up on Q1 Results and Thoughts on a Securities Listing

By Kirk Boodry

The end of Rakuten free plans is unlikely to have a major industry read across although the end of loyalty point chasing should help save on promotional costs
Mobile erosion has likely peaked but full-year losses for FY22 will be higher than last year. We expect the progression to profitability to be modest
Listing the securities business is a positive as it surfaces fintech value but allocating proceeds from valuable asset sales to funding mobile is not

Arteria Networks (Buy) – Q4 21 Results Reaction: Between a Rock and a Hard Place

By Kirk Boodry

Q4 results and FY22 guidance largely in-line with consensus and Redex expectations
Shares trade at a discount to peers but should command a premium on potential mid-term growth prospects and lack of mobile exposure
That may reflect relative size as Arteria lacks the scale and liquidity to attract interest from investors in search of defensive names

Ibiden (4062 JP): Guidance Looks Too High, but Dropping Toward an Entry Point

Share price down 35% since last December, probably because FY Mar-23 guidance seems over-optimistic. Gearing to falling demand and rising costs is high.
Sales and profits should eventually rebound as 5G smart phone and data center related demand continue to grow, and after new capacity comes on line in 2024.
First rate IC substrate and printed wiring board technology, and sound finances, make the company a candidate for long-term investment.

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May 24

Japan: Kadokawa Dwango, Tokyo Stock Exchange Tokyo Price Index Topix, Kubota Corp and more

In today’s briefing:

Kadokawa – How Much Upside Potential Does Elden Ring Offer?
About an Article on Job Satisfaction
Kubota (6326 JP) | US Housing Risk to Big to Ignore

Kadokawa – How Much Upside Potential Does Elden Ring Offer?

By Mio Kato

Kadokawa earnings were strong with 4Q OP 56% above consensus despite a meagre 1.5% beat at the revenue line.
Margin guidance was nonsensically conservative however as despite revenue guidance being in line with consensus the company guided for OP to miss by 25% and actually decline by 3.9% YoY.
That prompted a 16.3% decline the day after earnings but the stock has rebounded and now sits just 2.1% below its pre-earnings level.

About an Article on Job Satisfaction

A data showed that “the percentage of employees who feel fulfilled at work is 56% in Japan, 10 ppt below the global average,” indicating the lower motivation of Japanese employees.
Another survey showed that companies with more employees who feel happiness through their work increased sales more than companies with fewer employees who feel happiness
The disclosure of “human capital,” which is now the focus of attention, should trigger a shift in management from focus on cost competition to focus on creating high value-added businesses.

Kubota (6326 JP) | US Housing Risk to Big to Ignore

By Mark Chadwick

Kubota’s stock declined in sympathy with agricultural major Deere following a quarterly earnings miss
Kubota faces similar supply chain and cost pressures, but it is the US housing market that is a bigger concern
We believe that the market is underestimating the earnings risk for Kubota should the housing market start to cool

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May 23

Japan: ROHM Co Ltd, NTT (Nippon Telegraph & Telephone), Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Rohm (6963 JP): Short-Term Caution, Long-Term Buy
NTT (9432) Pullback Target to Buy for Rise to 4,250
About an Article on Strengthening ESG Fund Monitoring

Rohm (6963 JP): Short-Term Caution, Long-Term Buy

FY Mar-22 sales and profits were well ahead of guidance. Management is forecasting further growth this year, but mostly in 1H.
Margins are under pressure from rising production costs and depreciation, but cash flow and the balance sheet are strong.
Gearing to vehicle electrification and should provide protection on the downside and support long-term growth.

NTT (9432) Pullback Target to Buy for Rise to 4,250

By Thomas Schroeder

NTT’s rising channel will dominate trade with the topside to induce a rally stall on the back of RSI non confirmation of new price highs amid waning buy volumes.
RSI triangulation and bear divergence (non confirmation of new price highs) implies a deeper pullback to trendline. Priced in the bulk of good news for now.
May buy volumes have slows as the rise matures. Us the top of the noted range to reduce and buy a pullback near trendline support.

About an Article on Strengthening ESG Fund Monitoring

I would like to discuss the Nikkei article, “FSA surveyed 37 asset management companies offering ESG-related investment trusts and found that 40% of them have no ESG professionals.”
If it’s impossible to have a ESG professional, and if a fund called ESG fund is set up because of revenue needs, then perhaps the fees need to be reviewed.
As for ESG wash, since ESG is scheduled to be included in annual securities reports from FY2023, ESG wash of the issuing company is expected to become an issue.

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May 22

Japan: Japan Post Holdings, Taisho Pharmaceutical Holdin, Towa Corp and more

In today’s briefing:

Last Week In Event SPACE: Woodside Petroleum, Brambles, Tabcorp, HKBN, Japan
Taisho Pharmaceutical (4581 JP): A Compelling Play on Japan’s Consumer Spending Recovery
TOWA (6315): Watch the Order Flow for an Entry Point

Last Week In Event SPACE: Woodside Petroleum, Brambles, Tabcorp, HKBN, Japan

By David Blennerhassett

The downside to Woodside Petroleum (WPL AU) remains, but the reasoned downside is smaller than it was before.
CVC walks, but it doesn’t stop Brambles Ltd (BXB AU) privatisation speculation.
If Tabcorp and The Lottery Corp are seen as low volatility growth properties, then the stability of cashflow puts it into rarified air among “growth bias” which has gotten trashed.

Taisho Pharmaceutical (4581 JP): A Compelling Play on Japan’s Consumer Spending Recovery

By Tina Banerjee

Taisho Pharmaceutical Holdin (4581 JP) is the leader in the Japanese OTC drug market. The company’s Lipovitan, Pabron and RiUP brands capture top market share in their respective categories.
With the re-opening of economy, increasing number of people are indulging in outdoor activities and consumer spending is recovering. These should boost Taisho’s OTC drug business.
The company’s prescription pharmaceutical business is well-positioned for long-term growth, driven by strong performance of existing drugs and upcoming new product launch.

TOWA (6315): Watch the Order Flow for an Entry Point

Management is guiding for single-digit sales and profit growth in FY Mar-23, but new orders fell 39% from Q2 to Q4 of last fiscal year.
The Book-to-Bill Ratio fell from 1.66 in Q2 to 1.01 in 4Q, but quarterly orders and sales both remained far above the levels recorded in the three years to Sep-21.
Even if the company does not drop into the red as it did in previous cycles, the downside risk to profits could be 50%.

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May 21

Japan: Shiseido Company and more

In today’s briefing:

Shiseido: Around 59% Upside Possible on Upgrades to Consensus

Shiseido: Around 59% Upside Possible on Upgrades to Consensus

By Oshadhi Kumarasiri

At 4% below the COVID sell-off low level, Shiseido Company (4911 JP) is looking genuinely attractive over the medium-long term.
In addition, there could be a shift in the short term market sentiment towards Japanese cosmetics with China’s COVID lockdowns expected to ease from the beginning of next month.
With the downside risk limited to less than 10%, we think it may be a good time to start owning Shiseido.

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May 20

Japan: Seiko Epson, SCREEN Holdings, Safie, Sumitomo Dainippon Pharma Co, Tokyo Stock Exchange Tokyo Price Index Topix, MatsukiyoCocokara and more

In today’s briefing:

Epson (6724) – A Big Buyback Amid Benign Backdrop
Screen Holdings (7735 JP): Good Results, Optimistic Guidance, Great Uncertainty
Safie – Cost Overshoot Could Drive This Lower But…
Sumitomo Dainippon Pharma Co (4506 JP): New Launches Ensure Post-Latuda Growth Trajectory
About an Article on the Skills Matrix
Japan Tourism | A Journey of a Thousand Miles Begins with a Single Step

Epson (6724) – A Big Buyback Amid Benign Backdrop

Seiko Epson (6724 JP) announces the first special div for the 2023 Nikkei 225 dividend futures.
And it also announces a VERY big buyback. The headlines say 9.5%. The reality is more like 4.0-4.4%, but that is still going to be 15-20% of Real World Float.
Given mildly positive backdrop, a net cash position, low multiples, and lack of major Real World Float active investor, this could go up.

Screen Holdings (7735 JP): Good Results, Optimistic Guidance, Great Uncertainty

Screen Holdings beat FY Mar-22 profit guidance by a wide margin. This year, management is aiming for 12% sales growth and a 22% increase in operating profit.
New SPE orders have exceeded sales for seven straight quarters and the backlog is at a record high. But 1H of FY Mar-23 is expected to be weak.
A new factory is scheduled to come on line in 4Q, raising total SPE capacity by 20%. The risk is that this will coincide with a downturn in demand.

Safie – Cost Overshoot Could Drive This Lower But…

By Mio Kato

Safie’s 1Q results disappointed the market as revenue came in 5% lower than the average of two consensus estimates and R&D expense surged.
Nevertheless, 1Q should be the worst quarter of the year as downside from the specific distributor issue is now quantifiable and the stock is now on 2.5x 2022 EV/Sales.
Valuations are already highly compelling and if the sentiment driven sell off continues we would be looking for 5-10x returns over a 3-4 year timeframe.

Sumitomo Dainippon Pharma Co (4506 JP): New Launches Ensure Post-Latuda Growth Trajectory

By Tina Banerjee

Sumitomo Dainippon Pharma Co (4506 JP)‘s flagship drug Latuda will loss patent protection in the U.S. in 2023. Latuda is already seeing revenue erosion.
Sumitomo is expected to reap the benefit of new products launched in the U.S. market in 2020 and 2021. These are expected to gradually become next growth drivers.
The company has a rich pipeline and targets to launch at least two new drugs in the U.S. in next two years.

About an Article on the Skills Matrix

I would like to discuss the Nikkei article, “An increasing number of companies are disclosing their skill matrices, but few explain why those skills are needed by the company.”
The reason for the rapid increase in the number of companies disclosing skill matrices over the last year is the addition of Supplemental Principle 4-11-IV in revised Corporate Governance Code.
METI and other in hiring of independent directors, there is a tendency for boards of directors to be composed of individuals who are aligned with the wishes of the president.

Japan Tourism | A Journey of a Thousand Miles Begins with a Single Step

By Mark Chadwick

Ancient proverbs dictate the pace of policy change in Japan. But, the first step has been taken
Investors should be watching for further relaxation of inbound tourist restrictions, particularly on the Chinese market
Out top pick on this thematic is MatsukiyoCocokara (3088 JP) . Tourists used to account for over 10% of sales, but there is more…

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