In today’s briefing:
- KKR To Sell a 20-22% Stake in Kokusai Electric (6525)?
- Toyota Group Cross-Holding Structure Primer – Holdings, Unwind Progress, Buyback Policies, Etc
- Recruit (6098 JP) – BIG Headline Buyback But Disappointing if That Is Best Use Of Cash
- Nikkei 225 Index Rebalance Preview (Sep 2024): Potential Adds/Deletes, Capping & Funding Changes
- Kokusai Electric (6525 JP): Rumoured KKR US$1.8 Billion Secondary Offering
- TOPIX Inclusions: Who Is Ready (July 2024)
- Mercari (4385) | Fintech and Gig Economy as Key Catalysts
- Aeon Delight (9787 JP): Q1 FY02/25 flash update
- Faster Management Improvement Requires a Sense of Tension in Management
KKR To Sell a 20-22% Stake in Kokusai Electric (6525)?
- Today, a Reuters article came out saying that KKR would sell down half its 43% stake in Kokusai Electric (6525 JP) according to “two people familiar with the matter.”
- The article also said Kokusai Electric would buy back shares. Kokusai responded with a TDNET release saying “we did not release this info but we are considering various capital policies.
- It pays to look at the Shareholder Structure as it stands. This is bigger than it looks.
Toyota Group Cross-Holding Structure Primer – Holdings, Unwind Progress, Buyback Policies, Etc
- Last September in the release of its new Mid-Term Management Plan, Toyota Group member Aisin (7259 JP) announced a plan to cut cross-holdings to zero. JTEKT Corp (6473 JP) followed suit.
- It started with a selldown of Denso Corp (6902 JP), then Toyota Industries (6201 JP), now Aisin. Last FY, Toyota Group cos reduced crossholdings by ¥870bn. This year will be more.
- Attached below is a general breakdown of Toyota Group cross-holdings, discussion of cross-holding policies, and analysis of what is next, and what is not.
Recruit (6098 JP) – BIG Headline Buyback But Disappointing if That Is Best Use Of Cash
- Last December, Recruit Holdings (6098 JP) announced a ¥200bn buyback which sounded big but with lots of cross-holders, wasn’t huge. The stock is up 80% in 6+ months since.
- Today, the company announced a new buyback of ¥600bn. This is very aggressive, and at 25x EBITDA and 40x PER, is probably due to demand to sell.
- Crossholders now hold ¥2trln which is three-plus times this buyback. And if the price were to rise 10% a year for 3yrs, it would be four times.
Nikkei 225 Index Rebalance Preview (Sep 2024): Potential Adds/Deletes, Capping & Funding Changes
- The review period for the Nikkei 225 Index September rebalance ends in three weeks. There could be three changes at the rebalance with sector balance used for the additions.
- Depending on the changes, passive trackers will need to buy between 3-57x ADV (2.4%-24% of real float) on the inclusions and sell between 3.7-8.4x ADV on the deletions.
- Fast Retailing (9983 JP)‘s index weight is currently higher than 10% and that will result in capping in September. Passives will need to sell 6x ADV in the stock.
Kokusai Electric (6525 JP): Rumoured KKR US$1.8 Billion Secondary Offering
- Reuters reported that KKR & Co (KKR US), the largest Kokusai Electric (6525 JP) shareholder, plans to sell about half of its 43% stake, worth around JPY300 billion.
- As Kokusai’s shares are trading at 3.2x the IPO price of JPY1,840, KKR would be tempted to reduce its stake further. The 180-day IPO lock-up period expired on 22 April.
- Kokusai anticipates a return to growth and margin improvement. However, Kokusai trades at a material premium to peer multiples and is fully priced.
TOPIX Inclusions: Who Is Ready (July 2024)
- Quiddity’s “Who is Ready” series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
- In the last few days, SUNWELS Co (9229 JP) and Macbee Planet (7095 JP) have announced their moves to TSE prime which would eventually trigger a TOPIX Inclusion event.
- Macbee Planet was in our highest conviction list but SUNWELS Co was not. In this insight, we have made some modifications to our methodology to improve future hit rates.
Mercari (4385) | Fintech and Gig Economy as Key Catalysts
- Mercari’s US operations, responsible for major losses, saw a workforce reduction by 45%, potentially preceding a market exit to improve overall margins.
- Fintech growth is strong, with Mercari issuing over 3 million credit cards, achieving a 67% YoY credit balance increase, despite current operational losses
- Mercari Hallo, an on-demand work platform, has rapidly gained users and business partners, positioning it to capitalize on Japan’s growing gig economy.
Aeon Delight (9787 JP): Q1 FY02/25 flash update
- Sales increased by 2.5% YoY to JPY81.1bn, operating profit decreased by 5.2% YoY to JPY3.3bn.
- Sales growth in Facilities Management, Security Services, Cleaning Services, and Materials and Supplies Sourcing Services contributed to overall revenue increase.
- Operating profit fell YoY due to higher SG&A expenses despite segment profit growth in several divisions.
Faster Management Improvement Requires a Sense of Tension in Management
- Now that the defensive wall of cross-shareholdings has been lowered, the strategies of activist investors are beginning to work, as companies are forced to listen to demands of their shareholders.
- Many companies continued to be reappointed at shareholder meetings without fulfilling the role of management in maximizing shareholder interests and carrying out sustainable expansion.
- For faster management improvement, further increasing the sense of tension in management requires the elimination of further cross-shareholdings and a change in the mindset of domestic investors, including individual investors.
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