Brief Japan: Memory Chips and the Elasticity Myth and more

In this briefing:

1. Memory Chips and the Elasticity Myth
2. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY
3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

1. 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.

2. 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.

3. 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!