Daily Brief Japan: Nexon, Tokyo Electron, Softbank Group, Kaken Pharmaceutical, Tokyo Stock Exchange Tokyo Price Index Topix and more

• Nexon (3659 JP) reported Q2 earnings and Q3 forecasts today. Everything is generally “in-line” to tilting slightly light. But USD/yen volatility matters a lot. 
• The company announced a small dividend hike, from largely meaningless to ever-so-slightly less meaningless. And a plan to buy back ¥100bn of shares over 3 years. 
• The inheritance tax issue remains a big one, but overhang appears delayed and buyback accretion is small, and also appears delated. And there’s an index sell at end-September.

• A sudden decline in sales led to a 30% sequential decline in operating profit in the three months to June. Year-on-year, operating profit was down 17%.
• Nevertheless, management left sales and profit guidance unchanged – despite cutting their semiconductor equipment demand forecast – and R&D and capital spending continue to rise. 
• FY Mar-23 EPS guidance puts the shares on 13x earnings, but potential downside risk is considerable. Stand back while the economic recession unfolds.

In our view, Softbank Group’s (SBG) Q1/22-23 results were dismal, with the company reporting a record loss. This was the second consecutive quarterly loss, after SBG registered a big loss just three months ago. One positive factor is liquidity, with the company holding a large amount of cash after heavily monetising its liquid assets (mostly Alibaba shares) during the quarter.

The improvement in LTV despite the steep drop in NAV signals that the ratio, as defined and reported by SBG, is open to the company’s control and manipulation. SBG still has a lot of room to monetise its asset base (JPY 4.5 tn in Alibaba shares and JPY 1.2 tn in T-Mobile/Deutsche Telekom shares). Thus, LTV is no longer meaningful, as the company appears to be able to manipulate the ratio as it wishes, as long as it has liquid assets.

• Kaken Pharmaceutical (4521 JP) is reporting declining revenue from its three largest selling products, due to NHI price revision. These products together contribute more than 60% of total revenue.
• The company’s newly launched products are growing at a rapid pace. However, the fastest growing product Ecclock contribute just 2% of total revenue.
• Kaken guided for just 1% y/y revenue growth and 12% y/y decline in operating profit in FY23. Due to pipeline expansion, R&D expenses are likely to remain elevated.

• As discussed in my previous article, when the % of foreign shareholders increases, companies tend not to bring up the continuation of takeover defense measures at shareholder meetings.
• The threshold level, so to speak, of the % of foreign shareholders that determines whether or not to continue takeover defense measures is estimated to be in the 30% range.
• If other domestic institutional investors follow, threshold level will be lowered and lead to a more tense corporate management, which will have a positive effect on the board of directors.