Brief Japan: Rakuten (4755) Lyft Lifts Shares Price but There Is Much Further to Go. and more

In this briefing:

1. Rakuten (4755) Lyft Lifts Shares Price but There Is Much Further to Go.
2. 7-Eleven in India: Standard Franchise Model Would Require Minor Tweaks in India
3. Nexon Controlling Stake Sale: Names Included in Short List
4. Rakuten (4755 JP): Lyft IPO’s Big Lift Unlikely to Lead to a Sustained Re-Rating
5. 🇯🇵 Japan • Fortnightly Update – Liquidity Rules

1. Rakuten (4755) Lyft Lifts Shares Price but There Is Much Further to Go.

Assuming a sum of the parts valuation the shares are cheap. We can assume the fintech business is worth perhaps Y800-900bn (based on 10x ebit, similar to Credit Saison), the domestic e-commerce operation (which makes an operating profit of about Y70bn on revenue of Y450bn) is worth perhaps Y1.2tr (assuming a valuation of 3x sales vs. 3.5x for Amazon). There are other parts of the business which detract and there are others, including a Y350bn plus investment portfolio which add but overall, all this compares with a market cap of a mere Y1.3tr. This suggests the market is thinking that Rakuten is more than throwing its MNO investment of Y600bn away. Given the Governments desire to reduce prices in the mobile market, and its desire for 4 operators, we would suggest this is overly negative. The recent announcement that Lyft will seek an IPO has lifted the share price given its 10% stake in this name (rumoured valuation of $23bn vs. $15bn currently), but we suspect the shares have much further to run. The market knows earnings will be depressed for the next 2 years or so but does not anticipate any recovery thereafter it would appear.

2. 7-Eleven in India: Standard Franchise Model Would Require Minor Tweaks in India

• 7-Eleven partners up with Future Retail in an effort to enter the growing Indian Market
• Indian E-Commerce giants pose a significant threat to 7-Eleven’s plans
• 7-Eleven’s recent shift focuses more on developing markets.
• Lack of profitability in India could require changes to the standard franchise agreement in order to attract franchisees

On 28th February 2019, Seven & I Holdings (3382 JP), the operator of the world’s largest convenience store chain 7-Eleven, announced that the company has signed a master franchise agreement with Kishore Biyani’s Future Retail, the operator of the Indian large format store chain Big Bazaar, to expand the 7-Eleven convenience stores into India. Future Retail and Seven & I Holdings expect the first 7-Eleven convenience store in India to be opened in Mumbai in 2019.

3. Nexon Controlling Stake Sale: Names Included in Short List

• Korea’s local news house Hankyung reported the names that should be included in the short list. They are Kakao, MBK Partners (with NetMarble), Tencent, Bain Capital and another foreign PE whose name isn’t disclosed. Apparently, Amazon, Comcast and EA, didn’t make the short list. Those in the short list now get a chance to do due diligence. They will then participate in the main bidding round that is scheduled for early April.
• It is being reported that only Kakao and NetMarble (with MBK Partners) are truly interested in taking over Nexon’s management right. Tencent is expected to join either Kakao or NetMarble-led consortium in the end. Bain is looking into possible investment opportunities that may be created if this sale leads to a mandatory tender offer to Nexon minority shareholders. It seems safe to say that this comes down to a two-horse race: either Kakao or NetMarble.

4. Rakuten (4755 JP): Lyft IPO’s Big Lift Unlikely to Lead to a Sustained Re-Rating

Lyft Inc (0812823D US) has kicked off its IPO by posting its S-1 filing last Friday. Rakuten Inc (4755 JP) is Lyft’s single largest shareholder with a 13.05% stake. Rakuten has invested around $700 million to acquire its current Lyft stake and stands to make 3-4 times its investment if Lyft achieves its rumoured IPO valuation range of $20-25 billion.

5. 🇯🇵 Japan • Fortnightly Update – Liquidity Rules

Source: Japan Analytics

LIQUIDITY RULES – Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this ‘boom’ is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.

WEAK MACRO – Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on ‘borrowed time’.  

HOLD FOR NOW – This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.

MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. 

In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on Sakai Moving Service (9039 JP), Sumitomo Chemical (4005 JP), Parco (8251 JP), Chugai Pharmaceutical (4519 JP), Nichias (5393 JP), Raksul (4384 JP), Daito Trust (1878 JP), and Benefit One (2412 JP).