Brief Japan: Japan Stock Weekly and more

In this briefing:

1. Japan Stock Weekly
2. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019
3. DoCoMo Company Visit: Brief Comments on Mobile Competition and Payment Efforts
4. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong
5. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer

1. Japan Stock Weekly

Hikari Tsushin (9435) – we remain longer term buyers, it will continue to generate good profits growth and valuations are still not unreasonable. 

Mercari (4385) – a great domestic business, loads of buy notes but in our mind there are big issues with the US business and shares are almost priced to perfection.

NSK (6471) – given the share price, and the cycle, the question is when to start to buy. 

2. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.

Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016

3. DoCoMo Company Visit: Brief Comments on Mobile Competition and Payment Efforts

We met NTT Docomo Inc (9437 JP) today for a quick chat. Markets are focused on FY19 guidance and the magnitude of price reductions that DoCoMo plans, neither of which were on the table for discussion. We did get a little bit of color on the Q4 competitive environment (not too intense), the mobile payments effort (strategically important but less need to invest heavily like PayPay) and the impending sale of its 34% stake in Sumitomo Mitsui Card.  

4. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong

We recently met with Yahoo Japan (4689 JP)  for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants.  We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.

5. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer

Pan Pacific International (7532 JP) (Don Quijote) is on a roll at the moment.

The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.

Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.

At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.

The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.

These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.

Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.