Brief Japan: 🇯🇵 Japan: Winter Peer Group Results & Revision Scores – Contrarian Buys & Sells/Peak & Ex-Growth and more

In this briefing:

1. 🇯🇵 Japan: Winter Peer Group Results & Revision Scores – Contrarian Buys & Sells/Peak & Ex-Growth
2. Japan Consumer Markets: Stimulus Package to Offset Consumption Tax Rise
3. Will Rakuten Get A Near-Term Lyft?
4. A Comparison of Recent Visitors Trend to Korea and Japan
5. Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued

1. 🇯🇵 Japan: Winter Peer Group Results & Revision Scores – Contrarian Buys & Sells/Peak & Ex-Growth

– PEER GROUP SCORE MATRIX –

INTRODUCTION – Following on from our review of the Market Composite and Sectors, this Insight will cover the cap-weighted Results & Revision Scores for the 328 Peer Groups that comprise our 30 Sectors providing greater depth to our analysis of current business trends.  Peer Group definitions reflect both standard SIC/GICS classifications as well as local market conventions. The number of constituents and market capitalisation for each Peer Group varies widely. 

RRS/RPS SCORE MATRIX – Combining our Results & Revision Scores (RRS) with each Peer Group’s Relative Price Score (RPS) allows a classification of our Peer Group universe into four quadrants –

• ‘Contrarian Buy‘  > Low RRS & Low RPS 
• ‘Contrarian Sell’ > High RRS & High RPS
• Peak Growth‘ > High RRS & Low RPS
• ‘Ex-Growth/Turnaround‘ > Low RRS & High RPS

THE ‘QUADRANTS’ – In the two ‘Contrarian‘ quadrants, the market is aligned with the current earnings momentum of the Peer Groups suggesting opportunities exist only for those willing or brave enough to take a contrarian view.  For ‘Peak Growth‘ Peer Groups, the market is calling for a downturn in momentum that has yet to be reflected in quarterly earnings. Where the cycle is more prolonged than expected, there are often opportunities for short-term rebounds in what are normally relatively-inexpensive companies. The ‘Ex-Growth‘ quadrant often consists of former ‘Contrarian Sell‘s where the market is reluctant to acknowledge that the cycle has turned. This quadrant can also contain ‘Turnarounds‘ – formerly ‘Contrarian Buys‘ where the market is correctly anticipating a change in fortunes.    

2. Japan Consumer Markets: Stimulus Package to Offset Consumption Tax Rise

Government plans to manage the effects of the consumption tax increase of 2% to 10%, due in October, continue to develop.

As in 2014 when sales tax rose from 5% to 8%, companies are nervous that the increase will lead to a significant downturn in consumption, and the government is chafing under pressure, both from businesses and the opposition.

The latest idea is to pump more money into the economy, while at the same time insisting that Japan’s massive debt levels will fall, partly thanks to stimulus from Japan’s new free trade deal with the EU and its role in the TPP.

3. Will Rakuten Get A Near-Term Lyft?

Rakuten Inc (4755 JP) is much in the news for many reasons – one of which being a plunge into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, having officially applied for the license in February 2018 and seeing it approved in April.  – the license for which it applied a year ago, with approval received in April 2018. The goal has been to use its initial foray into the MVNO business where it has more than 1.5 million users, and increase its footprint to attract some of its 100+mm Rakuten IDs, 7mm Rakuten Bank accountholders, 3mm Rakuten Securities accountholders, so that it can increase the LTV (LifeTimeValue) of its existing customer base. 

The goal is to introduce service this year (also a requirement of the terms of its license), growing steadily to have 15mm subs in 10 years. The estimated hardware spend is said to be ¥600-700bn on base stations and equipment, initially concentrating on areas in and around mass transit stations in urban areas such as Tokyo and Osaka, and then expand outward. The company has signed deals with numerous partners in electricity distribution such as Tokyo Electric Power Co (9501 JP), Chubu Electric Power Co (9502 JP), and Kansai Electric Power Co (9503 JP) to install transmission equipment on these companies’ power poles and other infrastructure.

The shares have suffered mightily since the plan came to light in mid-December 2015, underperforming the TOPIX Info & Communications Sector Index by more than 20% in the fourteen months through yesterday. The sharp drop on the left hand side of the chart was a two-day sell-a-thon by investors convinced the company was about to waste billions of dollars. The Info & Communications Sector Index also dropped sharply on that day on fears that a fourth entrant with a declared goal of dropping monthly charges by 40% would increase churn at the existing Big Three (NTT Docomo Inc (9437 JP), Softbank Corp (9434 JP), and KDDI Corp (9433 JP)) and possibly cause a price war. The shares dropped from about ¥1140 to ¥1020/share, and then slid another 30-odd percent in the next six months to ¥700/share.

The shares have rebounded, fell back in autumn general market weakness, rebounded a tie-up on payments with KDDI announced Nov1 and decent Q3 numbes announced less than 2 weeks later, got crushed in the sharp global selloff in November and December, then had a v-shaped rebound at the start of 2019. 

At the end of January Rakuten Mobile Network received blanket licenses to transmit on 1.7Ghz in the major regions  covering Tokyo, Kyoto, Osaka, Nagoya and Yokohama from the local Bureaus of Communication, and expects to receive others soon. Last week, Rakuten reported full-year earnings through end-December with revenues up 16.6%yoy to just over ¥1.1 trillion, OP (IFRS) at ¥170.4bn, and Net Income at ¥142bn and on the same day announced Nokia had been granted the contract to deploy a turnkey solution as had been previously tested and speculated. 

There are numerous telecom and retailing experts publishing on Smartkarma who have more expertise on Rakuten’s telecom plans and their plans to compete harder against Amazon Japan and Yahoo Japan and others in the e-tailing space. 

I am not going to pretend to their level of knowledge on telecom or retailing (I found Kirk Boodry’s piece on the upcoming 5G allocations in March to be particularly informative) but I will note that Rakuten has a) the ability to borrow against the hardware and licenses, b) can roll out hardware quarter-by-quarter, and c) the KDDI/Rakuten deal is important. In it, KDDI will give Rakuten access to its nationwide roaming network, and Rakuten will provide KDDI with expertise on mobile payments – especially relevant as KDDI is now building out au Financial as briefly discussed here. 

But There is More NewsFlow To Come, And THAT is Interesting

In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mm in a then just-become-unicorn ride-sharing company called Lyft Inc (0812823D US), which at the end of the Series E round in May 2015 would leave it with ~11.9% of the company at a ~US$2.4-2.5bn post-money valuation. Recent articles suggest that Rakuten remains the top investor (though a WSJ article 2 weeks ago noted there would be golden shares. Hiroshi Mikitani remains a board member of Lyft.

That becomes important as by all accounts I can find (much more detail below), Rakuten continued investing in the four subsequent funding rounds through last summer, leaving the company as the largest single shareholder in Lyft as it prepares for its IPO later this spring. Lyft confidentially filed its IPO paperwork (a “draft S-1”) with the SEC in early December 2018, leaping ahead of Uber in the race to IPO first so the much larger Uber valuation doesn’t block Lyft’s chances for raising funds.

Reuters carried an article Thursday night Asia time saying Lyft planned to start its roadshow the week of March 18th, with an expected valuation of US$20-25 billion, and the first-mover advantage would allow Lyft to set the metrics it wants to use upon which to be judged and priced (if it waited, it would have to be compared to Uber). That could mean more emphasis on the company’s strong suite of self-driving partnerships (drive.ai, Ford, GM, Jaguar, Nutonomy, Waymo, others). A March 18th roadshow would require a full S-1 filing two weeks prior to that.

A successful IPO story based on picking up market share (reportedly doubled to 28% by end-2018 vs end-2016) might make Rakuten’s other investments look good too (Rakuten led Series B, C, D, and E funding for Spanish-language ride-hailing app cabify from 2014-2018 (and reportedly pushed cabify to merge with Lyft last year) and has invested in multiple rounds in SE Asian version GoJek.

The runup to this IPO and the clarity a filing could provide on ownership could provide a near-term fillip to Rakuten’s share price. 

4. A Comparison of Recent Visitors Trend to Korea and Japan

• In this report, we compare the recent dynamic foreign tourists trend to Korea and Japan. In January 2019, the number of foreign visitors to Japan rose 7.5% YoY to 2.69 million. A total of 0.78 million from South Korea visited Japan in January (DOWN 3% YoY) followed by 0.75 million people from China (up 19.3% YoY).
• According to Korea Ministry of Economy & Finance (MoEF), the number of people from China to Korea increased 35.1% YoY in January 2019.
• As evidenced by the better than expected Chinese visitors to Korea and worse than expected South Korean visitors to Japan in January, there is an increasing indication that this trend could continue in 2019. Many of the Korean related cosmetics stocks have positively reacted to the recent data. One of the interesting trades to be long on a basket of Korean cosmetics related stocks and be short on a basket of Japanese cosmetics related names. 

5. Semiconductor Downturn Hurts Tokyo Electron; Stock Is Still Overvalued

• Tokyo Electron (8035 JP) is a semiconductor equipment manufacturer based in Japan. The company has been operating in the semiconductor space for several decades and generates nearly 90.0% of its revenue from the sale of semiconductor equipment.
• The company revenues are highly correlated with worldwide semiconductor revenues. The current softness in the semiconductor market has already caused a decline in company earnings for 3QFY03/19 and we expect the company earnings to deteriorate further as the market has just begun witnessing the demand decline.
• Even though IoT, cloud, big data, 5G and AI are expected to drive semiconductor revenues and make up for the declining demand from smartphones, tablets and PCs, we do not expect this to drive a significant change in semiconductor demand for another few years as the technologies are still not fully developed.
• Based on our valuation, the company share price is still overvalued despite the stock losing more than 20% to-date since the market started decelerating in mid-2018. As the current semiconductor cycle nears its worst, we feel the company share price will dip further with the earnings outlook deteriorating.