In this briefing:
- Harmonic Drive: Measuring the Potential Downside Risk
- Bank Danamon Goes Ex-Rights
- Memory Chips and the Elasticity Myth
- Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY
- Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
1. 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.
2. 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.
3. Memory Chips and the Elasticity Myth
During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase. This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.
4. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY
After the recent inspection issues, the company clearly needs to tighten compliance issues and is now talking about improving profitability over the next two years by getting rid of low profit and none core businesses. Given the current valuations, the mid-term outlook and the renewed focus on profitability we would look to buy here. The internal issues that have hit the share price in the past appear behind them. We would look for an operating profit of about Y50bn to 3/20 which would put the shares on an EV/ebitda multiple of about 5x. The shares yield 3% and still trade at book.
5. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp.
The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.
Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!
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