Brief Japan: After Zozo: Onward Sets Sights on Digital Renaissance and more

In this briefing:

1. After Zozo: Onward Sets Sights on Digital Renaissance
2. Japan Stock Weekly
3. CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?
4. Mercari (4385) A Great Business but over Priced
5. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade

1. After Zozo: Onward Sets Sights on Digital Renaissance

Onward Holdings (8016 JP) made a bold stand against price discounts in January when it announced plans to stop selling on ZOZO (3092 JP) but the timing was not ideal as Onward lowered its FY2018 sales guidance shortly thereafter..

With Zozo no longer a partner, Onward is investing in the growth of its own e-commerce business and has installed a new 50-person digital strategy group to make this happen.

If the plan works, Onward could finally break away from its dependence on the contracting department store apparel market but the journey to reach this goal will be a long one.

2. Japan Stock Weekly

Takamatsu Construction (1762)

It is possible that 3/19 results may fall a bit short of estimates but next year will see a decent bounce in earnings given the good orders currently being seen. The shares are very cheap on 2x 3/20 EV/ebitda so we do not see much down side risk here, but any such weakness should be views as a great buying opportunity. This is a well-run and conservative business in an otherwise often poorly run sector. Eventually there must also be the possibility of a higher payout ratio. In our view, however, this is later rather than soon but must come. A decent long term buy in the construction space.

Fujitec (6406)

The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.

Prored (7034) 

Good, first quarter results and in our view, an upward to come. 

3. CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?

The news released on the 11^th of March, about Tesla Motors (TSLA US) choosing CATL (A) (300750 CH) as battery supplier has focused much attention on the two companies and other battery suppliers. CATL which grabbed Panasonic Corp (6752 JP)’s leading position in the industry last year now seems to be grabbing the latter’s key customer as well. The news circulating states that, CATL could power Tesla’s Model 3 cars which Tesla is planning to start assembling at Tesla’s new factory near Shanghai. Following the release of this supposed deal, the stocks of the two companies moved positively, with CATL surging by almost 6.7% while Tesla rose by almost 2.4% during the day.  However, both parties have not commented on this news yet or made any formal announcement regarding such a potential deal. In our Insight, Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, we mentioned that Tesla was looking to locally source its batteries in China and that CATL could potentially be one such supplier. However, in January this year, it was reported that Tesla had signed a preliminary agreement with China’s Tianjin Lishen to supply batteries for its new Shanghai car factory, making the current news look less believable. Although it seems like the ongoing news about a Tesla-CATL pair up lacks integrity, with CATL sort of denying its intend to work with Tesla (according to an updated news release), the news does look interesting and its effect upon the related companies seems noteworthy.

4. Mercari (4385) A Great Business but over Priced

Established in 2013, this has been a huge success story in Japan. The company operates the largest C to C mobile app that allows customers to trade in second hand goods with each other. Growth has been phenomenal. In the year to 6/15, Mercari had revenue of Y4.2bn, three years later (6/18) this had risen to Y35.7bn. This growth carries on, first half revenue this year to December 2018 rose 45% to Y23.7bn. It has begun an operation in the US, currently loss making, and has just introduced “Merpay”, a prepaid card incorporated into one’s mobile phone along the lines of Suica that allows users to purchase goods and pay bills. Funds can be deposited following a sale on Mercari’s site or transferred from a bank. Revenue will probably continue to grow at a rapid pace and whilst there are some that will jump on board, it is impossible to come up with any sensible valuation that can really justify a purchase here. There is no p.e.r. and the company will be loss making for the next couple of years. Its market cap of Y440bn means that it is trading on perhaps 6x 6/20 sales. On top of this, there are risks with regards to the viability of its US operation. Management appear to be aware to this and have set certain time limits for a turn around. There are many BUYS out on this name, thematically it has much going for it, but the valuation leaves us cold.

5. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade

In my original insight on January 15, 2019 TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity, I proposed setting up a stub trade to profit from the mis-priced stub business of Amorepacific that was trading at its widest discount to NAV in at least three years. During the 65 calendar days that followed, Amorepacific Group (002790 KS) has gained 7.3% and the outperformed Amorepacific Corp (090430 KS) by 2.84%. The trade has reverted to average levels in a period of about two months and 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-trade analysis on the Amorepacific stub