In this briefing:
- Global Bottoming Process Continues; Remain Overweight China
- Descente Descended and Itochu Angle Is More Hostile
- KDDI: Key Takeaways from Company Visit Are Mostly Positive
- Harmonic Drive: Measuring the Potential Downside Risk
- Bank Danamon Goes Ex-Rights
1. Global Bottoming Process Continues; Remain Overweight China
The MSCI ACWI and ACWI ex-US have managed to break above their respective 200-day moving averages, and are now bumping up against overhead resistance. Supportive of a bottoming global market, cyclical Sectors are emerging as leadership. We examine the technical state of major developed and EM markets and highlight in today’s report and highlight attractive and actionable stocks within the Materials, Manufacturing, and Technology sectors.
2. Descente Descended and Itochu Angle Is More Hostile
Descente Ltd (8114 JP) has been in the press quite a bit in recent days with management commentary about how the company and directors disagree with the Tender Offer launched by Itochu Corp (8001 JP) to raise their stake from 30% to 40% and how it could lead to conflict of interest and worsening management, lower morale for employees, and a loss of independence.
Management, former management, and former employees have all joined the party. Wednesday saw a significant sell-down of shares to a post-Tender Offer low, but it was not clear why.
Descente had, on the 26th, noted in a puff piece in the Nikkei that it would move up the release of its next Mid-Term (Three Year) Plan (normally due in May this year), and it would focus on growing direct sales in China through more stores, growing sales in the US through adding products to the list (currently the major product in North America is skiwear), selling LeCoq Sportif in Indonesia and Munsingwear in Vietnam. WHEN is unknown, but the explicit goal is to encourage shareholders to keep their shares rather than tender them to Itochu.
Today saw a new filing from Itochu in which it amended its original announcement, claimed Descente’s activity in the media was additional and additive to the Target Company Position Statement filed on 7 February, and for that reason, their activity had not been appropriately disclosed to shareholders. Furthermore, Itochu noted that while the jibber-jabber had been going on the last two-plus weeks, Descente had asked Itochu to negotiate post-Tender management structure plans, and Itochu had agreed. Itochu and Descente talked for 9 days from 11-20 Feb but Descente was bad-mouthing Itochu in the press at the same time. That induced Itochu to stop talks. And late today, the Nikkei has released a 27 February interview with the CEO of ANTA, Itochu’s longtime textile partner in China and a 6.86% holder of Descente shares, where he says that he supports Itochu’s tender offer, will not sell their shares in Descente, and would support Itochu efforts to restructure management.
These three new developments change things in interesting ways, in my opinion pushing Descente’s own plans closer to Itochu’s, and introducing the possibility of significantly more hostility to come, with a much higher likelihood Itochu can win the proxy wars to come.
In-depth analysis below the fold.
Previous insights on the situation and its runup are listed below.
Recent Insights on the Descente/Wacoal and Itochu/Descente Situations on Smartkarma | ||
Date | Author | Insight |
12-Sep-2018 | Michael Causton | Wacoal and Descente Agree Partial Merger to Head Off Itochu |
16-Oct-2018 | Michael Causton | Itochu Ups Stake in Descente – Refuses to Give up Dreams of Takeover |
21-Jan-2019 | Michael Causton | Itochu Confirms Intent to Deepen Hold over Descente |
31-Jan-2019 | Travis Lundy | No Détente for Descente: Itochu Launches Partial Tender |
10-Feb-2019 | Michael Causton | Itochu and Descente: Gloves Off |
10-Feb-2019 | Travis Lundy | Descente’s Doleful Defense (Dicaeologia) |
3. KDDI: Key Takeaways from Company Visit Are Mostly Positive
We expect the Q4 18 report in mid-May will be pivotal for sentiment on KDDI Corp (9433 JP) as the results for its current mid-term plan are announced and new targets for the next three years are set. This plays against a backdrop of moderately higher competitive intensity both in the near-term on cheap handsets and longer-term with Rakuten Inc (4755 JP) market entry. Shares are down 15% from highs in September 2018 as markets have factored in the new state of affairs but coming out of our meeting with the company today we feel more confident in how they are positioned.
4. Harmonic Drive: Measuring the Potential Downside Risk
With Harmonic Drive Systems (6324 JP) having rebounded as much as 56% from its trough this year, risk-reward looks decidedly less attractive now. While we had been somewhat constructive on the name due to order looking like they have a hit bottom, a closer analysis of the breakdown of orders has us thinking that a potential rebound could underwhelm relative to the markets revenue expectations and that the stock’s premium multiple could leave it more vulnerable than more modestly priced peers.
5. Bank Danamon Goes Ex-Rights
The process of the merger between Bank Danamon Indonesia (BDMN IJ) and Mitsubishi Ufj Financial (8306 JP)‘s local unit Bank Nusantara Parahyangan (BBNP IJ) is proceeding apace.
Today, the shares go ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected.
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