Brief Japan: Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction and more

In this briefing:

1. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction
2. Lynas Investor Briefing – Looks Like More Capex Ahead
3. Nexon Sale: Nexon Japan Tender Price Estimations
4. Japan Post Insurance – The ToSTNeT-3 Buyback
5. 🇯🇵 Japan • Relative Price Scores – Market, Sectors & Peer Groups > Extreme Negative Divergence

1. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction

Japan Post Holdings (6178 JP) (JPH) plans to raise up to US$3.3bn via selling its stake in Japan Post Insurance (7181 JP) (JPI). The size of the deal has been adjusted downwards owing to the buyback conducted today morning.

I’ve covered some of the background and index weightage impact in my earlier insight: Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact. 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?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• 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

In this insight, I’ll run the deal through our framework and analyze the performance of some of the other sizeable deals in the recent past.

2. Lynas Investor Briefing – Looks Like More Capex Ahead

At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update. 

3. Nexon Sale: Nexon Japan Tender Price Estimations

This post estimates Nexon Japan tender price. For this, I use the same approach that a local PE named “MBK Partners” would use based on EBITDA multiple and IRR on a 3 year exit. From their position, the only proven value-up path would be KOSPI moving. MBK must try to stay as conservative as possible. Whatever Netmarble value addition should be an extra when deciding on a tender price. So, I base my estimation solely based on KOSPI moving effect. For this, I use NCsoft as a sole valuation comp.

4. Japan Post Insurance – The ToSTNeT-3 Buyback

Japan Post Insurance (7181 JP)announced on April 4th after the close that Japan Post Holdings (6178 JP) would offer 168.1mm shares of Japan Post Insurance to the public, with another 16.9mm shares offered in an over-allotment. This is big news as it is almost 31% of the shares outstanding of Japan Post Insurance and will dramatically increase its float. 

One can say it is a big deal – ¥450bn (~US$4bn) of stock and at announcement it was equivalent to the last 477 days of traded volume. More importantly, this ALMOST like an IPO in that the placement is almost 3x the original IPO size (66mm shares) and will get a lot of foreign investor attention. 

In addition, JPI announced it would conduct a buyback for up to 50 million shares (with a spending limit of ¥100 billion) on the ToSTNeT-3 off-hours auction-like trading system on days between April 8th and April 12th. 

In its announcement of the decision to sell shares, Japan Post Holdings said that if JPI did indeed conduct the buyback, it might participate, in which case the size of the offering “may decrease.”

The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%. 

After the close Friday, JPI announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That is 6.2% of shares outstanding. 

Understanding the dynamics and the rules here AND about the offering may tell you something about how this will work. 

5. 🇯🇵 Japan • Relative Price Scores – Market, Sectors & Peer Groups > Extreme Negative Divergence

– RELATIVE PRICE SCORE – 

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 put on a comparable scale, ‘Overbought’ and ‘Oversold’ outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company data is cap-weight-aggregated into 328 Peer Group and 30 Sector Relative Price Scores. Outlier thresholds are set at +4 & -2 for Companies, +3 & -1.5 for Peer Groups and +2 and -1 for Sectors. These thresholds equate with the top and bottom first-to-second percentiles of historical observations from which mean reversion normally takes only a few months.

OUTLIER TRENDS – In the past, increases in the percentage of companies that are either Overbought or Oversold has been a useful indicator of market trends with a rising number of Overbought outliers being bullish and an increasing number of Oversold outliers being bearish and the crossovers between the numbers of each offering market timing signals.  The current situation where both sets of outliers are rising has only occurred once before in the last 30 years – in 1999/2000 shortly before the peak of the ‘tech bubble’. We attribute some of the market’s distortions to the Bank of Japan’s market activities and the increase in algorithmic trading. Whatever the cause, repeating the 2000 tech bubble playbook is unlikely to end well. 

NEGATIVE ‘SPREAD’ – On a daily closing basis, the Oversold outlier percentage is currently 3.17%, the highest since December 25th 2018, despite the total market value being 14% higher than on that day. The ‘spread’ between Overbought and Oversold outliers is now -1.10, and has only been wider for three days at the end of last year either side of Christmas Day. Nevertheless, the Overbought percentage reached a new fifteen-year high at the end of March despite the total market value being 12.6% below the peak of January 2018. In a polarised market, the winners keep on winning, and the losers keep on losing.  

MARKET TIMING – Using the crossover from Net Overbought to Net Oversold has been a reasonably good market timing indicator over the last two decades and would have avoided the five-year-long slump from 2007-2012. The most recent monthly closing signal was generated in January when the total market value was ¥634t, 2.7% lower than the current level.

DAILY TIMING SIGNALS – Using daily closing prices but slightly wider parameters to reduce ‘noise’ the signals are reasonably effective. The last signal was a sell on 18th December 2018 when the total market value was ¥623b, 4.5% below the current level. Both monthly and daily indicators have large negative ‘spreads’ and are unlikely to generate ‘buy’ signals for some time. Both are also suggesting that further declines lie ahead.   

– SECTORS – 

28-YEAR TIMELINE – The twenty-eight-year history of Sectors’ Relative Price Score is shown above and chronicles the periodic extremes of both Overbought and Oversold and the persistence of each. Only seventeen Sectors have been Overbought during this period for a total of 546 months of which half were before 2001. The average Overbought persistence is 4.3 months or 3.4 months excluding the Internet Content & Services Sector.  Only fourteen Sectors have been Oversold since 1992 for a total of 243 months of which 55% were before 2001. The average Oversold persistence is 5.7 months although this has risen to 7.5 months since 2001. Currently, three Sectors are Overbought – Consumer Services, Other Consumer Products, and Healthcare, and two Sectors are Oversold – Banks and Utilities.    

In the DETAIL section below, we provide an update on recent Sector and Peer Group trends and make some specific recommendations. A second Insight will follow looking at the Relative Price Scores for Companies.