Brief Japan: Horiba (6856 JP): Long-Term Buy on Pullbacks and more

In this briefing:

1. Horiba (6856 JP): Long-Term Buy on Pullbacks
2. Japan: Winter Results & Revisions Flash – Cycle Earnings Peak Was December 26th
3. *TW3/North Asia* That Was The Week That Was 🇰🇷 🇯🇵 11th-17th February 2019 @Smartkarma
4. Rakuten to Covertly Cut Merchant Commission Rates?
5. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

1. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

2. Japan: Winter Results & Revisions Flash – Cycle Earnings Peak Was December 26th

WORST Q SINCE AUTUMN 2016 – Since our last Results Flash in November – Japan: Autumn Results & Revisions Flash – Flatlining + Weakest Quarter in Two Years – the operating and net profits of Japanese listed companies have peaked and declined by 2.0% and 7.5%, respectively while forecasts for the same have fallen by 1.7% and 4.1%. The stock market’s initial reaction to the peaking of earnings for this cycle was a sharp 15.5% decline which climaxed on Christmas Day. A softer tone from the US Federal Reserve and a weaker Yen have helped restore a degree of confidence and the recent 12.1% rally has taken aggregate market capitalisation back to early-December.  As a result of the downturn in profits, trailing and forecast earnings multiples have reverted to August 2018 levels and can no longer be considered a bargain. For the restoration of a ‘normal’ market multiple (16.7x), either share prices have to rise by 18% (all else equal) or net income has to decline by a further 16%. Our money is on the latter being the more likely outcome.

Source: Japan Analytics

ROLLING TTMs – Our series of rolling trailing-twelve-month (TTM) quarterly aggregates of all listed companies confirm the profit peak. Revenues are still increasing by 5-6% a year, and by 1-2% a quarter, however, the rate of increase is slowing and the implied growth rate for the current quarter is just 0.5%. Operating Income declined by 1.9% qoq in the quarter just declared and will be flat this quarter, although, as few companies revise full-year forecasts with Q3 earnings results, this forecast should be considered optimistic. Operating margins are forecast to be 33bps lower than in TTM-3. TTM Net Income fell by 8% qoq, although yoy growth is still a positive 3%. The 1.6% forecast growth for this quarter implies that the most recent quarter had an excessive level of write-offs. We are not so sanguine.

SECTOR BREAKDOWNS – In the DETAIL section below we shall examine the trends in earnings results and forecasts for the 30 sectors that make up our Market Composite.  

3. *TW3/North Asia* That Was The Week That Was 🇰🇷 🇯🇵 11th-17th February 2019 @Smartkarma

TW3 NORTH ASIA – This was a busy week for the North Asian team on Smartkarma. with 967 results announcements and 577 forecasts revisions in Japan and plenty of corporate activity in Korea including LG Uplus/CJ Hello. As is our wont here, we also had a number of providers take opposite sides on a number of issues (e.g. GMO Internet (9449 JP)).

Our Top 3 Insights of the week are Pelham Smithers Associates –  SoftBank: Does Nvidia Show It Overpaid for ARM?,  Douglas Kim‘s A Surprising Finding of Outperformance & Quarterly Earnings Conference Call Recording in Korea, and  Michael Causton ‘s ZOZO: The Kingmaker Abandons His King

The format is a little different this week with Insights grouped by vertical and split between Bullish and Bearish with no country separation. Any feedback for further improvements is always welcome!  

Softbank Buyback More Than It Appears To Be

Poongsan Holdings Stub Trade: Current Status & Trade Approach

Stake in Quadric.io Denso Attempts to Keep Chip Makers Close 

KDDI Tender Offer for Kabu.com (8703 JP) Decided

Nongshim Holdco/Sub Trade: Current Status & Trade Approach

LG Uplus/CJ Hello – CJH Overhang Concerns Will Push It Up

LG Uplus – CJ Hello Acquisition: Current Status & Trade Approach

SoftBank: Does Nvidia Show It Overpaid for ARM?

LG Uplus to Acquire CJ Hellovision: What’s Next for Tbroad and D’Live?

Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

Doosan Heavy & Doosan E&C Rights Offers: Assessment & Estimation

Ecopro BM IPO: Valuation Analysis 

Nomura Real Estate Master Fund Placement

Daiwa House REIT Placement – Well-Flagged but Barely Accretive to DPU

Dreamtech IPO: Valuation Analysis

A War Between Netflix & Disney = $$$ for Studio Dragon

Sony: Mispriced, Misunderstood, or Both?

Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years

Hana Financial: Hand It to Hana

Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

ZOZO: The Kingmaker Abandons His King

Rakuten to Covertly Cut Merchant Commission Rates?

Shimadzu (7701 JP): 3Q Results Suggest a Trading Range

NCsoft: Major Highlights of 4Q18 Earnings Conference Call

Tsubakimoto Chain Co (6371 JP) Double-Digit Growth Continues

NTT Corp: The Rising Dividend Story Is Playing Out

Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

GMO Internet Reports Solid FY12/18 Despite Heavy Crypto Losses

Shiseido: 2018 Results – Setting Expectations Too High 

Concordia Financial Group (7186 JP): Out of Focus

Olympus: 3QFY03/19 Profits Decline on Litigation-Related Costs

Monex Group (8698 JP): Upside Unlikely on Weak Cryptocurrencies

Robotics: Nabtesco & HDS Results Strong; Still No Reason to Own Fanuc

Recruit Holdings Reports Strong 3Q Results; Remains Expensive

GMO internet FY2018 Results – The Shareholder’s [Re]Turn

Stock Outperformance & Earnings Conference Call Recording in Korea

No Upside For Korean Companies – Underweight

Korea Circuit Long Support for Press Above Overhead Barriers

Fanuc Bullish Trade Points off of Base Line Support

Suruga Bank Bottom Projection

4. Rakuten to Covertly Cut Merchant Commission Rates?

Rakuten (4755 JP) has been under pressure recently from Amazon (AMZN US) and other competitors in its core online mall business and now seems to be giving more attention once again to the original Rakuten Ichiba, including a plan to cut shipping fees, although this also looks like a face-saving way to cut merchant commissions.

Rakuten is also investing in new logistics infrastructure to try and match the customer services levels of Amazon and ZOZO (3092 JP).

As part of this effort, Rakuten just announced a 9.9% stake in a logistics firm called Kantsu. The deal is part of Rakuten’s strategy to accelerate the move towards consolidated shipments of orders on Rakuten Ichiba – one of the key weaknesses of the Rakuten model compared to Amazon and Zozo.

Rakuten also just announced its year-end results this week: Domestic GMVs rose 11.2% to ¥3.4 trillion for the year ending December 2018. While GMVs rose and revenue increased by 9.2% to ¥426 billion, operating income on domestic e-commerce fell 17.7% to ¥61.3 billion partly due to higher logistics costs. For 4Q2018, operating income fell 27.3%.

5. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

Three months ago, Minebea Mitsumi (6479 JP) announced that it would launch a Tender Offer for U Shin Ltd (6985 JP) and it would take just under three months until the approvals were received and it could officially start the Tender Offer process. It took a couple of weeks longer, as proposed by U Shin’s update on 30 January, which indicated anti-trust approvals had been received.

The background to the Tender Offer was discussed in Minebea Mitsumi Launches Offer for U-SHIN in early November.

My first conclusion in November was that this was the “riskiest” straight-out non-hostile TOB I had seen in a while. 

This is a wide-open deal. The buyer owns 1 round lot. The largest holder is an activist. The deal is being proposed at not such a super-high multiple (8x forecast FY earnings for the year ending 31 December 2018) and 4.9x EV/EBITDA. It is 3.7-4.0x when taking into account the 67 different equity positions they held at the end of last year, some of which they have recently liquidated. 

from (8 Nov 2018) Minebea Mitsumi Launches Offer for U-SHIN

In the interim, the activist dropped their position in half (necessitating a filing of a Large Shareholder Report for going below 5% – and they may have completely liquidated by now), and an investment bank has gone above 5% since then.

The financial advisory “valuations” at the time were more than questionable. A discussion of the valuation levels can be found in the previous insight (I don’t need to repeat them here, just go there).

Today, the company raised its OP and Ordinary Income forecasts for the year ended 31 December 2018, but lowered its Net Income forecast by 98.8% due to writeoffs at many overseas facilities. Then the promptly reported earnings (also only in Japanese) a few seconds later (only available in Japanese). 

Op is now forecast to drop 2% in 2019 vs 2018, but the 2019 forecast is 11+% higher than the 2018 forecast was just yesterday. The forecast for Net Income is ¥99.35/share, putting the deal at <10x forecast PER. And even less if one considers that the cross-shareholdings could be reduced. 

The New News

Today Minebea Mitsumi announced the launch of its Tender Offer, to commence tomorrow, at the same price as originally planned (¥985/share), and to run for 38 days. 

This deal is still perplexing to me. It’s easy enough from an industrial standpoint. I mean, why not buy relatively cheap assets then see if you can cross-sell or assume some attrition. But for investors… I wonder why they put up with this.