Japan

• Softbank is apparently trying to garner a $50bn valuation for Arm at its IPO and secure $8bn in margin loans on the back of that.
• We think that is a stretch though it is certainly not impossible that it would succeed. 
• However, in terms of real value we suspect Arm could be worth less than $10bn and articulate why below.

• Nickel price was the catalyst for the share price underperformance in the last 2 weeks, especially after the Russian invasion of Ukraine which drove it up to a 100% increase.
• Its main product is a lithium-ion secondary battery separator that is critical for rechargeable battery safety. Thus the sell-off due to the higher commodity price especially nickel is unwarranted.
• W Scope Corp (6619 JP) share price has underperformed the NCM and LFP battery makers presents a compelling buying opportunity. 

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. CIFI Holdings
2. China Jinmao Holdings
3. Kaisa Group Holdings
4. Guangzhou R&F Properties
5. Sunac China Holdings

and more…

• During the period from December 2020 to February 2022, the increase in foreign ownership and the increase in Tobin’s q contributed to the increase in market capitalization.
• Since it’s difficult to expect board practices to directly affect market capitalization over one-year, I maintain the hypothesis that improving board practices raise it by leading to improving key actions.
• Regarding key actions, rather than implementation of individual shareholder return policies alone, systematic implementation of such policies in the context of growth and capital allocation management policies is more effective.

• There is a Toshiba Corp (6502 JP) EGM next week for shareholders to vote on the company’s Separation Plan, with a shareholder proposal to re-engage take-private buyers.
• Four+ weeks ago, the Board unanimously supported the first, and unanimously opposed the second, and shareholders and major proxy advisors came out against the first.
• Now Independent Director Raymond Zage, originally from one of the dissenting shareholders, has written a letter stating he has voted FOR the shareholder proposal the board rejected. OOPS! 🤭

• Softbank is a $23bn winner on the China bounce as Alibaba (+37% over 2 days, $18bn) and Vision Fund (+$4.8bn) recovered from selling pressure over the last week
• Improving sentiment aside the discount remains above 50% and the rebound appears to be more about correcting excess selling than a change in market outlook
• We remain wary of Chinese exposure in the near-term on political, regulatory and economic risks although the worst appears to be over for now

• The announcement from Raymond Zage that he would vote for 3D’s proposal at next week’s EGM is a curious development.
• It suggests that pressure on Toshiba’s directors could be ramping up significantly. 
• Whether that is a good thing or not is a serious question though.

• The pending IPO of Rakuten Bank could be worth ¥380bn (2x book) and boosts appreciation of a fintech business we think is worth ¥1,400/share
• That is well above the current share price reflecting the valuation drag of an expensive mobile segment, which is expected to hit peak losses in Q1 22
• We expect mobile break-even will take longer than expected and downside here offsets fintech excitement – we remain at Neutral

• LINE Gift has doubled its user base to 20 million in a year, and added merchants like Seven Eleven, but isn’t content with this. 
• It has only just integrated with Zozo and Yahoo Shopping and expects these new partners, as well as new TV ad campaigns, to deliver a major increase in user numbers.
• The collaboration with Z Holdings’ through Yahoo Shopping and Zozo shows the potential for leveraging the groups’ huge user base.

• Recent hacks into Nvidia have resulted in leaks that have got the rumour mills churning again for an upgrade to the Switch. 
• Most details are similar to previous reporting by Bloomberg for the Switch Pro that was expected last year but failed to materialise. 
• However, the recent leaks point to a bigger GPU upgrade that previously envisioned and that has implications…

• Last year, Aslead Capital tried a hostile partial tender offer on Fuji Kosan, perhaps to get in, or perhaps to try to trigger an overbid to exit. 
• Fuji Kosan Company (5009 JP) made life difficult for them, and Aslead backed down. Now the stock has fallen 25% from where they made their Tender Offer.
• And now they are selling. That will leave ENEOS and SHIGETA Mitsutoki as the two largest shareholders…. 👀

• With Omicron under control, Japan is expected to relax home quarantine requirements for foreign travellers some time or the other.
• Meanwhile, Google Mobility data hints that domestic customers are starting to head back to places like shopping centres, suggesting an improvement in demand conditions.
• Based on valuation and the price performance trend, long time underperformer Pola Orbis Holdings (4927 JP) seems like the best option to capitalise on the reopening of Japan to foreign tourists.

• Q3 22 results were in-line/ahead of consensus expectations but shares fell 7% today anyway
• Operating profit fell 10% as improvements in operating losses for new businesses like Lohaco and logistics were not enough to make up for higher spending in the core B2B segment
• Despite the decline, Askul shares have largely outperformed peers YTD on optimism over the planned launch of quick commerce business Yahoo!Mart announced in late January

• TSE will begin market reclassification on April 4. Nikkei introduced some of the issues and problems related to this, and I would like to share my thoughts on these issues.
• This market reorganization is far from what investors desired. TSE, which charges listing fees from the listed companies, is more likely to bend to the wishes of the listed companies.
• I believe that what should have been reformed was not the reorganization of market segments but the revision of TOPIX, and TSE market reorganization missed the point from the beginning.

• We have updated our earnings forecast for S Foods (2292, the company) and raised our target price to 5,300 yen from 4,900 yen

• We have raised our OP forecasts from 12.9bn yen to 17.3bn yen (+36.9% YoY) for FY2/22, 13.6bn yen to 17.5bn yen for FY2/23, and 14.6bn yen to 16.3bn yen for FY2/24

• In calculating our target price, we used a residual income model (RIM) with a cost of equity of 6.0% (unchanged) and a terminal growth rate of 0.4% (unchanged), based on our earnings forecasts for FY2/22-FY2/27 (updated due to progress of the term)

• The review period runs from 18-29 April for the May SAIR, the results will be announced on 13 May (Asia-time) with the changes implemented after the close on 31 May.
• Most of the potential changes are in China with few changes spread across the other Asian markets. China loses the most number of index members, followed by Japan.
• There are over 4 weeks to the start of the review period and there will be changes over that time as stock prices move around.

• When Softbank announced its strange buyback in November we wondered aloud whether buyback maximums of ¥1trn and 250m meant Softbank foresaw a ¥4,000 share price in its future. 
• With the stock price now having jauntily sashayed down to ¥4,265 it is a question why they aren’t more aggressive with their buyback. 
• A question that may be answered by all the cash raising measures that Softbank is engaged in perhaps?

• Pan Pacific International Holdings (7532 JP) is Japan’s largest discount retailer but also a major GMS operator. 
• It is on track to achieve consolidated sales around ¥1.87 trillion by the end of the year, 85% of this in Japan despite the lack of inbound tourists.
• PPI also has a great retail proposition in Asia which is proving popular. The long-term outlook at home and overseas looks solid.

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.

• Softbank Group
• Sunac China Holdings

• This article more directly examines whether the momentum of improvement in corporate governance practices is related to stock returns.
• Significant positive correlations are shown between changes in Metrical score and changes in market capitalization, changes in foreign ownership, changes in ROA (past 3-years average) and changes in Tobin’s q.
• Not every year sees the same degrees of improvement in corporate governance as the current year. In 2021, CG Code was revised and the prime-market-listing-standards adopted some items from it.

• Japan has seen a large drop off in new mall developments in recent years. 
• This is partly due to a dwindling supply of viable locations but also because of competition from e-commerce.
• To make malls more relevant, Aeon Mall is shifting to a more localised approach with a broader range of services.

• Geared to rising demand for semiconductor and other industrial polishing services in general and rapid growth in the production of advanced power semiconductors in particular.
• Sales and operating profit could double over the next 5 years, but dilution from capital raising might hold EPS growth to 50%.
• Selling at 9.2x EPS guidance for FY Mar-22. 10x potential EPS implies 65% upside. Risks include small market cap and potentially volatile quarterly earnings.

• Mani Inc (7730 JP) shares have plunged 19% since we have published our bearish insight on the company on January 13.
• FY22 guidance implies 22% and 56%, y/y, decline in operating profit and profit attributable to owners of parent, respectively, in Q2FY22.
• We are cautious on H2FY22 recovery and financial performance of Mani due to worsening COVID-19 condition in China, which is one of its major markets.

• Workman has consolidated its position as a leading domestic outdoor/sports casual retailer in the last two years.
• Growth has been less dramatic but it has developed more infrastructure and brand foundations for what it hopes will be the next big expansion.
• It is expanding the number of banners, increasing the ratio of private label and widening the number of categories it sells, including footwear and camping. 

• NHK Spring released an announcement mid-week to the effect that they were selling a golf practice facility they owned. The profit on the sale will exceed 10% of Enterprise Value.
• In addition, the company has another 25-30+% of Enterprise Value in shareholdings which return far less than the Mid-Term Management Plan target ROE of 8%. 
• On an Adjusted EV basis (EV less non-operating financial assets), this stock trades at less than 1.5x EBITDA two years out. 

• On March 11, I participated in an ESG meeting of Kurita Water Industries (6370). I would like to briefly touch on the content of the meeting.
• Kurita’s commitment to strengthening its executive officer structure requires stronger board oversight and further transparency, and there is considerable room for corporate governance reform.
• Its D&I initiatives are just beginning. Water resources are a very important environmental issue, and Kurita has a very important role to play and is expected to contribute.

• Every so often, sudden shocks reduce Hamamatsu Photonics’ usually high valuations. This is one of those times. 
• Valuations are starting to look attractive compared with their 5-year ranges. But not compared with their 10-year ranges.
• Strong 1Q results support FY Sep-22 guidance. Management’s 3-year sales and profit forecast would be reasonable in a normal operating environment. But the environment is not normal. 

• Both Alibaba (-6%) and Didi (-12% pre-market) are down on regulatory pressure 
• Vision Fund valuation losses are approaching $20bn for Q4 and the current (unrealized) portfolio has turned negative
• NAV/Share and the share price are at two-year lows and gains from the post-Covid tech run are largely gone

• Recent events in Ukraine should be highly favourable for Chiyoda as they raise the potential for LNG capex. 
• US to Europe deliveries could involve significant liquefaction capacity build-out at good pricing points and even hydrogen could be in the mix. 
• If orders come through and rising profit drives the share price up that could also lead to positive capital structure changes.

• While Inpex has almost tripled from its late 2020 bottom the stock is up just 17.5% compared to the beginning of Jan 2020. 
• With crude prices 77% higher than at that time that suggests that there is plenty of upside left in this trade. 
• This is further supported by plans for volume expansion and relatively healthy reserves.

• This article asks the question, “Do companies with high corporate governance ratings have high stock returns?” I would like to discuss by using the Metrical Score to evaluate corporate governance.
• Companies with higher Metrical Scores tend to have increased market capitalization from December 2020 to February 2022, showing significant positive correlation between Metrical Scores and change in equity market capitalizations.
• Metrical has been monitoring the stock returns of top 20 Metrical Score companies since 2015. The top 20 composites have outperformed both TOPIX and JPX400 indexes on a cumulative basis.

• 1H RP 1.3bn yen, of which subsidy income 3.2bn yen. Torikizoku Holdings (3193, the company) announced 1H (Aug-Jan) results

• 2Q (Nov-Jan) operating loss significantly reduced to 0.1bn yen. Positive impression

• One of the few izakaya chains to survive the pandemic

• This morning Institutional Shareholder Services recommended against both Toshiba’s break up plan and 3D’s alternative proposal. 
• Both proposals looked uncertain and with ISS coming out against them it now appears more likely that both will be rejected. 
• That leaves Toshiba in limbo once again and we aren’t convinced the exit will be a privatisation.

• Following on from a recent Street Fighter 6 reveal, Capcom announced new IP Exoprimal at today’s Sony State of Play. 
• The two announcements strengthen Capcom’s pipeline for FY23 and FY24 although leaks had already revealed the likely launch timing of SF6. 
• Exoprimal is new news, however, and provides a glimpse into Capcom’s strategic thinking.

• Square Enix had four of the twelve titles featured at today’s Sony State of Play. 
• While none of the titles was one of they IPs for Square Enix they demonstrate the depth of IP possessed. 
• In addition, the trailers point to Square Enix’s domestic development studios maintaining high quality standards even for smaller titles.

• Koei Tecmo appears to have made some strides in improving the quality of Stranger of Paradise: Final Fantasy Origins.
• This bodes well for the future of its business effectively reskinning its in-house titles with popular outside IPs.
• This makes us more interested in the name but we are still waiting for the shoe to drop on investment income.

• Regarding “ESG Funds Performance” featured in Rapid Response, I would like to consider it in conjunction with an article on ESG funds that was published in Nikkei on February 6.
• In fact, ESG funds are already underperforming when it comes to active funds. It is believed that there have been issues with stock picks.
• As far environment, Metrical doesn’t believe in excluding it because it is in energy/commodities sector. We look at how the company is thinking and acting and moving forward on ESG.

• Komeda’s February same-store wholesale sales 97.2% vs. 2021, 102.9% vs. 2019

• SSS vs. 2019 for food service companies: Omicron impact in February

• Stock price trends for restaurant companies: Outperforming TOPIX despite downtrend

• Mubadala bought 20.8% of Cosmo Energy Holdings (5021 JP) in 2007 at ¥5,068/share (split-adjusted). A few months later it dipped below that and hasn’t seen that price since. 
• The sovereign wealth fund sold 5% last year at ¥2,610, and just 7 months later is bailing on the other 15.7% at a 12-17% discount. 
• Result? Float will rise. Index funds will buy a bit, and active foreign institutional investors will nearly double their holdings.

• Mubadala aims to raise around US$287m via selling its 15.8% stake in Cosmo Energy Holdings (5021 JP).
• The stock has been doing well owing to the rise in crude prices and Mubadala has sold some stock before and hence, the deal might not be wholly unexpected. 
• However, its an accelerated bookbuild in Japan, which don’t have a great track record.

• Our 2022 conviction call Dowa Holdings is up 25% since we made that call and was up as much as 44% a few days ago. 
• We believe the recent correction is a simple reaction to the speed at which it had been rising. 
• We see significant further upside and unlike peers we believe all-time high earnings can be sustained even with commodity price moderation.

• Japan Tobacco (2914 JP)’s share price fell 14% from the bottom end of the upward trend channel and underperformed Topix by 6% over the last 15 days.
• Even if Russia yields zero dollars, we think the impact on JT’s valuation could be around 20%.
• With demand for cigarettes expected to go up during these war times, we think the market reaction of this scale is unwarranted.

• February SSS 102.9% vs. 2021, 88.2% vs. 2019 (pre-pandemic)

• Monogatari Corporation (3097, the company) disclosed monthly data for February (on a preliminary basis)

• Same-store sales for the Yakiniku division were 103.6% vs. February 2021 (129.9% for January), 69.2% vs. February 2020, and 95.2% vs. February 2019

• OP successfully on track with company target despite large-scale promotions

• Segment earnings: Japan, US, and Taiwan entering full-scale recovery phase

• Large-scale collaboration with Detective Conan in March and April