In today’s briefing:
- Kokusai Electric IPO: The Bear Case
- APAC Airline Sector – Cost Inflation Management Differentials Crucial as Cargo Yields Normalise
- Too Many Portfolio Companies Is One of the Reasons for Not Enough Engagement
- Daiichi Sankyo (4568 JP): Strong Start of FY24; Partnered Oncology Drug Candidate Hits First Goal
- Pal Group’s 3Coins: Coining It
- Seibu Giken IPO Trading – Still Not Particularly Enticing
Kokusai Electric IPO: The Bear Case
- Kokusai Electric (6525 JP) is a speciality manufacturer of semiconductor production equipment. KKR & (KKR US) seeks to raise about US$750 million through listing Kokusai.
- In Kokusai Electric IPO: The Bull Case, we highlighted the key elements of the bull case. In this note, we outline the bear case.
- The bear case rests on a declining revenue trend, a challenging near-term growth target, high China revenue risk, margins on a downward trend, increasing inventory days and deteriorating FCF.
APAC Airline Sector – Cost Inflation Management Differentials Crucial as Cargo Yields Normalise
- We publish a detailed update on the APAC airline sector, featuring ANA, Cathay Pacific, JAL, Korean Air, Qantas and Singapore Airlines, addressing cargo yield normalisation, and unit cost inflation.
- We see 24% upside to consensus EBITDAR for JAL in FY24 to March 2024, and 24% downside risk at Singapore Airlines based on our detailed analysis and quarterly earnings bridges.
- We expect earnings at most carriers to decline in calendar 2024 versus 2023 as the combination of cargo yield normalisation, fuel price pressure, and further capacity restoration prompt margin declines.
Too Many Portfolio Companies Is One of the Reasons for Not Enough Engagement
- The problem of agenda setting in engagement with investment firms is due to the mismatch that is occurring in each of the listed companies and investors.
- Meetings without top management present disappoint investors who have prepared thorough analyses of the issues facing the portfolio company. Top management should also avoid listening to template questions at meetings.
- It’s unrealistic to ask passive funds that cannot devote resources not to ask template questions. Active funds of Japanese investment managers may have too many portfolio companies to engage adequately.
Daiichi Sankyo (4568 JP): Strong Start of FY24; Partnered Oncology Drug Candidate Hits First Goal
- Daiichi Sankyo (4568 JP) reported a 25% YoY revenue growth in Q1FY24, mainly driven by oncology drug Enhertu. The company reiterated FY24 guidance, with revenue and operating profit growing double-digit.
- Daiichi Sankyo’s drug candidate datopotamab deruxtecan demonstrated statistically significant and clinically meaningful progression-free survival benefit in certain types of breast cancer patients in pivotal phase 3 trial.
- Enhertu is well-positioned for geography and indication expansion as well as market share gain. Strengthening oncology portfolio and rich late-stage pipeline entail significant growth opportunity for the company.
Pal Group’s 3Coins: Coining It
- Pal Group posted record sales in FY2022 partly because fashion retail recovered but mostly because of it has a huge hit on its hands: variety store 3Coins.
- Cheap variety stores have always been popular and are becoming even more so as prices rise and people spend more on the home.
- 3Coins has doubled sales in 2 years but expects continued strong growth going forward. With fashion sales also improving, Pal Group is one of few solid bets in lifestyle retailing.
Seibu Giken IPO Trading – Still Not Particularly Enticing
- Seibu Giken (6223 JP) (SG) raised around US$93m in its Japan IPO after pricing at the top of its downward revised range.
- SG sells desiccant dehumidifiers and VOC concentrators in over fifty countries globally. Its two main products accounted for over 90% of its revenue in 2022.
- In our previous notes, we looked at the company’s past performance and valuation. In this note, we talk about the trading dynamics.
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