Brief Consumer: Zozo: Zo Far Zo Bad and more

In this briefing:

1. Zozo: Zo Far Zo Bad
2. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
3. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade
4. Koolearn: Losses in Full View
5. Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

1. Zozo: Zo Far Zo Bad

Just a day after the publication of a deep dive Smartkarma Originals report (Zozo: A Shooting Star Shooting Itself in the Foot) on  ZOZO Inc (3092 JP)  by Michael Causton and ourselves, the company announced moderate 3Q results, a 34% downgrade to its current year OP forecast and a cut to its year-end dividend from ¥22 to ¥10, bringing its full year payout down from ¥36 to ¥24.

At the results meeting questions focused on the fallout of Zozo’s new Zozo Arigatou initiative which prompted some brands to discontinue sales on the Zozotown Mall, the reason for such a large downgrade just after the announcement of a very bullish medium-term plan, and even management compensation given such a disappointment.

We feel that the results underscore the issues raised in our previous report and that the stock could remain under pressure in-spite of how far it has already fallen.

2. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
• On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
• We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.

3. TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade

In my original insight on December 11, 2018 TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave , I proposed setting up a stub trade to isolate the market leading materials handling and automotive components business of Toyota Industries (6201 JP) that was trading at an unwarranted 35% discount to NAV . During the 56 calendar days that followed, Toyota Industries (6201 JP) has gained an underwhelming 4% and the trade has made 1.96% on the gross notional. This hasn’t exactly been a trade to tell the grand-kids about, more or less a flat result but in this insight I will outline why I think the trade is over.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-mortem trade analysis on the Toyota Industries stub
• alternative data support for my actions

4. Koolearn: Losses in Full View

When we previously argued that the Koolearn IPO was ‘hurtling towards losses’, its latest PHIP update provided little reprieve to our postulation.  Further analysis on the latest update can be found below the fold. 

5. Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

• Koolearn updated its IPS prospectus and posted operating losses for 1H2019 (ended Nov. 2018).
• The company spent significantly on online promotion, but we believe that online promotion is not useful.
• We also believe online marketing expenditures are not a productive use of the Company’s cash, as Koolearn’s brand was already well known among consumers due to its parent company, New Oriental.