Brief Japan: CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team and more

In this briefing:

1. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team
2. Shinetsu Buyback – Maybe More Than It Appears
3. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

1. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team

Our recent conversation with CyberAgent’s IR team suggests that a significant improvement in the OP margin is unlikely in the next few quarters. The OP margins of both Game business and the Internet Advertisement, while likely to improve gradually, are likely to remain low compared to recent history due to higher advertising and personnel costs.

Upfront investments in AbemaTV are likely to continue until the target of 10m Weekly Average Users (WAU) is met, which could take a year or more. The company expects around 50% of AbemaTV revenue to eventually come from premium users, which seems to be a shift in strategy, from a “free” service towards a more hybrid model.

CyberAgent’s share price closed at ¥4,050 on Tuesday, up 7.1% from its previous close, following the news that the stock was added to the Goldman Sachs’ conviction list with a reiterated buy rating. However, even before this, CyberAgent’s share price had been on a steady increase over the past two weeks (+29.0%), recovering from a one-year low in early February. This increase, despite rather mediocre 1Q results, a downward revision of OP guidance, and lack of any major short term catalysts is an indication that the market deems CyberAgent to be undervalued – mainly on the AbemaTV front.

2. Shinetsu Buyback – Maybe More Than It Appears

On 12 March 2019 after the close, Shin Etsu Chemical (4063 JP)announced a share buyback program to buy up to 14 million shares for up to ¥100 billion. If it bought all 14 million shares, that would be 3.3% of shares outstanding. Simultaneously, it announced a ToSTNeT-3 buyback of 11,001,100 shares at today’s closing price of ¥9,090/share which if all bought would complete the buyback program. 

As I write, the shares are up 4-6% in thin trading in the ADRs. 

There was some speculation across the Street there would be a buyback because of slowing earnings expectations and a surfeit of capital, which was itself important because of the company’s lack of recent history of buybacks (the last and only time the company has bought back shares (to date) was a repurchase of 3 million shares for ¥13.6 billion in late October 2008 when things were hairy (and cheap)). 

The shares are down over the past year, but the price in the past few days is not dramatically at the low end of the range of the past six months or so.

There may be some information in the context and structure of this buyback which tells you something different than people’s first reaction. 

3. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).

We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.