Brief Japan: Japan Post Holdings – The Future Is Complex, But Interesting and more

In this briefing:

1. Japan Post Holdings – The Future Is Complex, But Interesting
2. Maybe Koito’s Premium Can Be Justified
3. 🇯🇵 Japan • Relative Price Scores – Overbought & Oversold Companies – April 2019
4. Japan Post Holdings and Japan Post Bank – Early Thoughts on a Choice of Two Trades
5. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL

1. Japan Post Holdings – The Future Is Complex, But Interesting

On 9 April 2019, after a press release by the Ministry of Finance saying that it had commenced the selection procedure for underwriters to assist on such a sale, the Nikkei carried an article  (Japanese-only) saying that the government would sell down a stake in Japan Post Holdings (6178 JP) from its current 60-odd percent to a level of “over one-third” (presumably a level relatively close to one-third and a share) which is the minimum ownership level mandated by the Postal Service Privatization Act.  The proceeds of the sale are designed to raise money for reconstruction related to the 2011 Tohoku Earthquake. 

Currently, the Ministry of Finance owns 2.5595 billion shares out of the 4.5bn shares outstanding which is 56.88%, but the company has 10.34% of its shares as treasury shares so the MoF has voting rights of 63.3%. Another Nikkei article suggested the news meant a maximum sale of approximately 1.06 billion shares out of those 2.56bn shares held to bring the position down to 1.5bn shares exactly.

Importantly, IF the government got down to the “one-third plus one share” level (or close enough to it), that would complete the required privatization by the government based on the formal legal terms of the Privatization Act.

At Tuesday’s close of ¥1,286/share, 1.06bn shares would be ¥1.36 trillion as an offer size less fees and a discount to the close.  The Japan Postal Service Privatization Act specified that the amount raised reach ¥4 trillion in total. The amount raised in sales so far is ¥2.8 trillion according to the Nikkei. That suggests the minimum acceptable price at which such an Offering could take place is around ¥1,160-1180. However, the word used in the Nikkei article is profit so despite the government’s very low accounting basis, it is possible that the minimum price would be closer to the current price, or it could even be higher.

In any case… it is important to note other factors here.

Pricing is a problem. The current price remains below the last two times the government tapped the market.

Making the deal attractive is a problem. JPH is required to continue to own 100% of the postal service and the 24,000 post office branches across the country. With the use of physical post services declining, JPH needs to have some profits elsewhere to support that. Those postal branches are to some degree supported by payments made by JPI and JPB for fair usage, but it is not enough. JPH needs to do some M&A and it has stated its policy includes more of it. The first round (buying Toll Holdings) did not go well. The second round of buying 7% of Aflac Inc (AFL US) is (I think) a great idea, but it doesn’t hit the income statement for a couple of years.

Buybacks at the JPI and JPB level raise EPS at those two entities. However, it doesn’t raise the level of EPS at the JPH level. For that, you need to reduce the denominator there too. 

Exactly how this works. There are reasons to suspect that any offering later this year would be substantially smaller than what the Nikkei says, and as described in my original pre-IPO pieces Japan Post Holdings: The post-IPO details make for interesting possibilities and JAPAN POST GROUP : Bookbuilding Said “Mixed” But Know Your Details, the longer-term “solutions” to then-visible “issues” were obvious.

HOWEVER, this is interesting news.

There is light at the end of the tunnel, and it is not a train. 

2. Maybe Koito’s Premium Can Be Justified

We mentioned in Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target, that Koito Manufacturing (7276 JP) has managed to beat consensus estimates in 3Q after a series of disappointing results in the previous quarters. This was despite the weak nine-month ended results. The company cited the loss in sales from China (as a result of the deconsolidation of the Shanghai unit) alongside unfavourable economic conditions especially in China and Europe as key reasons for the decline in earnings. Our visit to Koito in March, gave us more insight on the effect of its deconsolidated Shanghai unit and its future plans in China, alongside their investment for capacity expansions and new products. Following these insights, we have revised our view on Koito in a slightly positive manner.

3. 🇯🇵 Japan • Relative Price Scores – Overbought & Oversold Companies – April 2019

– RELATIVE PRICE SCORE – 

INTRODUCTION – The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are thus on a comparable scale, ‘Overbought’ and ‘Oversold’ outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company outlier thresholds are set at +4 & -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. This insight updates our list of Overbought and Oversold companies, reviews the best and worst performing companies in terms of RPS over the last three months and adds some specific comments on stocks on each category.

STATISTICS – Currently, of the 3,804 listed companies for which daily RPS data is available, 79 companies are ‘Overbought’, and 117 are ‘Oversold’ – 2.1% and 3.1%, respectively of the total. For the 779 companies with a market capitalisation of over ¥100b, there are 42 ‘Overbought’ and 28 ‘Oversold’ companies, 5.4% and 3.6%, respectively illustrating the relative strength of larger capitalisation stocks at this stage of the cycle. 

RPS ‘TOPS’ – In the last two years, 438 companies have achieved an RPS of ‘4’ or more and the average Overbought ‘persistence’ is 45 days.  For companies with a market capitalisation higher than ¥100b, the numbers are 92 companies and 83 days – demonstrating the superior persistence of large capitalisation companies in this regard. Some examples of RPS mean reversion in the last three months have been Kyudenko (1959 JP), Nichirei (2871 JP). Fancl (4921 JP), FamilyMart Uny (8028 JP), Infocom Corp (4348 JP), and SanBio (4592 JP). 

RPS ‘BOTTOMS’ – 360 companies have seen their RPS fall to ‘-2’ or below in the last two years, and the average Oversold ‘persistence’ is 59 days. For larger capitalisation companies, the numbers are 82 companies and 84 days. Some recent examples of positive RPS mean reversion in the last two months have been Mercari (4385 JP), AGC (5201 JP), and Pksha Technology (3993 JP).

4. Japan Post Holdings and Japan Post Bank – Early Thoughts on a Choice of Two Trades

Post market close on 9th of April, as per media reports, the Japanese government said that it plans to sell another 1.06bn share of Japan Post Holdings (6178 JP) (JPH). The government aims to do so as soon as Sep 2019. The sale, at around US$12bn, would amount to 23.5% of the company and nearly 41% of the government’s current shareholding. It would mark the second sell down by the government since JPH listed in 2015. Post the news release, JPH shares closed down 3% on 10th of April. They are now trading below the IPO price, below the last placement price and just off their all-time lows.

The postal service privatization act seems to be in full swing, with JPH about to enter its third round of selling and Japan Post Insurance (7181 JP) (JPI) in the midst of its first post IPO sell down. However, Japan Post Bank (7182 JP) (JPB) has yet to see a sell down even though the recent deposit ceiling revision required JPH to reduce its holding in JPB. Were JPH to sell some of its JPB stake ahead of the government sale of JPH, it could mitigate a large part of its own placement using the cash that it generates from JPI and possible JPB stake sale to buyback some stock. Thus, there is a possibility that JPB placement might come before JPH’s next placement.

For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPI Placement: Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact
• JPI Placement: Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar

5. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL

• Asset Quality recognition is something of a black art with varied definitions for non-performing loans (“NPLs”).
• Firstly, we analyse what a NPL is.
• We then evaluate provisioning changes across Asia. We rank countries.
• We further analyse specific underlying NPL recognition issues in China.
• We then rank a sample of regional banks and countries by NPL recognition.
• Later, we take a look at how different systems come under NPL stress and how they cope often in a crisis environment.
• Finally, we wrap things up with some concluding insights about the cultural backdrop which defines systemic asset quality.