In this briefing:
- GMO Internet Inc. – Limited Downside as Crypto Business Weighs Little on Consolidated Performance
- TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave
- Hikari Tsushin (9435) Continues to Generate Profits Growth as New Business Streams Contribute. BUY
- Softbank IPO: Signs Point to Risk of Early IPO Price Break
- DeNA (2432): Undervalued Internet Stock
1. GMO Internet Inc. – Limited Downside as Crypto Business Weighs Little on Consolidated Performance
GMO Internet is currently trading at JPY1,485 per share which is just 7.6% above its 12-month low of JPY1,380 per share. The Group’s share price reached an all-time high of JPY3,020 in June 2018, however, it has declined by more than 50% since then following the company’s poor performance in its cryptocurrency and mining related segment led by stagnant crypto prices coupled with negative news on issues concerning advertising fraud in its Online Advertising & Media segment. This was further exacerbated by news that there will be delays in shipments of two bitcoin mining rig lines with refunds already issued in November. However, we believe, the downside is limited as the weaknesses of its crypto related business will weigh little on the consolidated earnings of the business. GMO’s business is structured in a way that its two main segments, namely, the Internet Infrastructure and Online Advertising and Media businesses are not prone to much volatility with recurring revenues. Therefore, we believe the negativity surrounding the company is exhausted and we expect the company to continue its strong growth trajectory.
2. TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave
If ever there was a stub business that is poised to capitalize on global trends of factory automation, automated logistics handling and electric vehicle prevalence, it is that of Toyota Industries (6201 JP). In August, I took an in-depth look at the major businesses of Toyota Industries and concluded that the market was not giving the company credit for the global leadership it has established in the forklifts and automobile A/C compressor businesses, nor for the progress it has made in the logistics equipment business. While the market’s oversight appeared to have corrected in September and October as the discount to NAV contracted from 34% to 25%, the trend has since reversed and the discount is back at trough levels of 35%. In August, I implied that this would be a good trading opportunity. Today, I explicitly recommend going long the stub.
In this insight I will cover:
- A market-neutral trade setup
- A review of the core unlisted businesses
- Alternative data used to gauge performance in the core business
- Risks of the trade
- A recap of ALL my stub trade ideas on Smartkarma, including track record of performance
3. Hikari Tsushin (9435) Continues to Generate Profits Growth as New Business Streams Contribute. BUY
The company forecasts an operating profit of Y55bn this year, the consensus is for Y57bn which is not unreasonable as management want to hold profits back. Next year assuming they make about Y64bn, the shares are on about 19x. With long term profits growth expected, and a good shareholder return policy this is a great domestic long term BUY. BUY into recent weakness. Foreigners own 24% of this name.
4. Softbank IPO: Signs Point to Risk of Early IPO Price Break
Coverage of Softbank Corp (9434 JP)‘s IPO on Smartkarma has offered a mix of viewpoints with some bullish and some bearish opinions. Our own take has been relatively subdued, leaning to the bearish side but only significantly so in the event that Docomo follows through with its announced price cuts and Rakuten’s entry as a full-fledged MNO is particularly aggressive.
By and large we consider the issue to be overvalued but felt that significant downside risk only existed if the dividend were to be cut, which we consider a distinct possibility but by no means a sure thing. This long -term view has not changed, however, we now consider some modest downside to be likely in the short term.
5. DeNA (2432): Undervalued Internet Stock
Dena Co Ltd (2432 JP) used to be the GO-GO internet stock for both retail and institutional investors in Japan during the previous bull run before 2008 and trading at 40-50x PER. The multiples have since then collapsed to 10-20x PER although the business prospect remains solid if not better. Benefiting from the increasing regulation in China, DeNA signed an agreement with Tencent Holdings (700 HK) to distribute Arena of Valor in Japan which will boost revenue and improve margin. At 14x PER and 1.2x PBR, DeNA looks attractive.
