Brief Japan: Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction and more

In this briefing:

1. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction
2. NTT Corp: The Rising Dividend Story Is Playing Out.
3. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
4. NCsoft: Major Highlights of 4Q18 Earnings Conference Call
5. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

1. Nomura Real Estate Master Fund Placement – Past Deal Did Well Only After a Slight Correction

Nomura Real Estate Master Fund, (3462 JP) plans to raise around US$300m to partially fund the acquisition of ten assets. 

The assets are a mix of office, retail and logistics and all were completed only in 2018. The cap rates for the acquisition look reasonable versus the existing assets that the REIT owns and the acquisition will likely be DPU accretive despite the relatively larger share of equity financing in the acquisition.

The deal scores well on our framework. However, the stock hasn’t really corrected post the deal announcement and the prior deal provided decent returns only post a correction in the share price.

2. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

3. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

4. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 

5. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?