Brief Japan: DoCoMo Company Visit: Brief Comments on Mobile Competition and Payment Efforts and more

In this briefing:

1. DoCoMo Company Visit: Brief Comments on Mobile Competition and Payment Efforts
2. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong
3. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer
4. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb
5. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

1. DoCoMo Company Visit: Brief Comments on Mobile Competition and Payment Efforts

We met NTT Docomo Inc (9437 JP) today for a quick chat. Markets are focused on FY19 guidance and the magnitude of price reductions that DoCoMo plans, neither of which were on the table for discussion. We did get a little bit of color on the Q4 competitive environment (not too intense), the mobile payments effort (strategically important but less need to invest heavily like PayPay) and the impending sale of its 34% stake in Sumitomo Mitsui Card.  

2. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong

We recently met with Yahoo Japan (4689 JP)  for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants.  We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.

3. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer

Pan Pacific International (7532 JP) (Don Quijote) is on a roll at the moment.

The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.

Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.

At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.

The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.

These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.

Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.

4. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb

An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm.  After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China. 

In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub. 

In this insight I will cover:

I. The Trade

II. The Stub Assets

III. My Track Record with Stub Trades

5. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

• Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
• The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
• Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
• Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.