Daily Japan: Japan: 2018 Company Review – Fishing Among the Outliers and more

In this briefing:

1. Japan: 2018 Company Review – Fishing Among the Outliers
2. Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines
3. Forecasting the Semiconductor Market
4. Big Trouble in Little Stocks? Maybe TSE Mulls Changing TOPIX
5. Pasona Non-Grata

1. Japan: 2018 Company Review – Fishing Among the Outliers

2018 – TOP 30 PERFORMING LARGE CAPS – The best performing stock in Japan over the last twelve-months rose by an average of 49%, with three companies more than doubling. Only one traditional manufacturing company – Toyo Seikan (5901 JP) – features on a list otherwise led by Healthcare (5), Retail (3), Real Estate (3), Restaurants (3), Transportation (3), and Other Consumer Products (3). Two companies – Daikyo (8840 JP) and NTT Urban Development (8933 JP) are in the process of being acquired. Four companies are currently ‘Overbought (Relative Price Score >4), ‘Fully Priced’ and have a declining Results/Revision Score – Workman (7564 JP), Fancl (4921 JP), Systena (2317 JP), and Kikkoman (2801 JP), and are candidates for profit-taking/short selling, as are Goldwin (8111 JP) and Familymart Uny (8028 JP) based on their Relative Price Scores alone.

2018 – BOTTOM 30 PERFORMING LARGE CAPS – The worst-performing list is led by Machinery (8), Technology Hardware (6), and Electrical Equipment (3) sector companies. ‘Malfeasance’ is the thread connecting Suruga Bank (8358 JP), Tateru (1435 JP), Rizap (2928 JP), KYB (7242 JP), and Fujikura (5803 JP). Only seven companies on the list have positive Results/Revision Scores; the average one-year change in that score was -15. Seven of the top-ten declining stocks were loss-making as of the most recent trailing-twelve-months. Only one stock – Harmonic Drive Systems (6324 JP) remains ‘Fully Priced’ and only one – Hosiden Corp (6804 JP) – is now in our ‘Deep Value’ category.

In the DETAIL below, we review the outlier stock in terms of our Relative Price Score/Results & Revision Score matrix which highlights outliers in four categories – Peak Growth, Contrarian Sell, Contrarian Buy, and Ex-Growth/Turnaround – looking at the performance of 2018’s outliers as well as identifying each category’s current outliers. We conclude with tables of the best and worst performers in each of our thirty market sectors. We wish all investors in Japan ‘tight lines’ in 2019.

NOTES ON SCORING METHODOLOGY

• The Results/Revision Score (RRS) is the average of the Japan Analytics’ Results Score and Forecasts/Revision Score for each company: –
  • The Results Score is calculated quarterly since 2008, using the most recent eight quarters of company data for revenues, operating income and operating margin and measure the rate, degree and consistency of change for each metric. The Results Score has a maximum of +30 and a minimum of -30 for each period. 
  • The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This score also has a maximum of +30 and a minimum of -30 for each period. 
• The Relative Price Score (RPS) measures the difference between the current relative share price and the mean absolute deviation of relative prices since listing which allows for a comparison of all companies on the same scale. Deviations in the top or bottom percentiles of historical observations of Relative Price Score are deemed to be ‘Overbought’ (OB) and ‘Oversold’ (OS), respectively. The company ‘thresholds’ are ‘+4’ for Overbought and ‘-2’ of Oversold. 
• Lastly, valuation ‘QUADrants’ group companies into the top and bottom 20% of TTM PER and PBR ranges and categorise outliers in both into four quadrants: “FP” = Fully Priced, “SP” = Speculative, “MT” = Mature and “DV” = Deep Value. “NE’ is assigned to companies which are loss-making in the most the recent trailing-twelve-month period.  

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2. Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines

Last Week in Event SPACE …

• On a Risk/Reward basis, the arb is not very attractive at M1 Ltd (M1 SP)‘s current price. 
• Pricing aside, Jangho Group Co Ltd A (601886 CH)‘s potential tilt for Healius (HLS AU) may get dinged by the regulator.
• DNO ASA (DNO NO) edges closer to completing its hostile offer for Faroe Petroleum (FPM LN).
• Unwind the Jardine Cycle & Carriage (JCNC SP) setup for those who entered at the recent low.
• Jardine Matheson Hldgs (JM SP)‘s outperformance of Jardine Strategic Hldgs (JS SP) is unjustified.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

• Pricing looks off according to Arun George, at a 15% discount to peers on a CY2019 EV/EBITDA metric.
• Still, Healius is not without issues, having to pay a backpay bill to staff last year, bump salaries for workers at its Victorian pathology division, while also losing a lucrative national bowel screening contract in 2017.  

• Notwithstanding the price, as Healius is an owner of sensitive medical data, the FIRB would take a very close look at this transaction, especially one where the acquirer is a Chinese entity, given the recent rejection of the CKI/APA Group (APA AU) deal and Huawei’s 5G. 

(link to Arun George ‘s insight: Healius (HLS AU): An Unattractive Bid)

Thanachart Capital (TCAP TB) (Mkt Cap: $1.8bn; Liquidity: $4.5mn)

As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, Athaporn Arayasantiparb, CFA tackles the obvious questions – what price and what benefits? 

• Based on his estimates, the potential improvements in ROE from the merger and potential divestment of Thanachart’s 19% stake in MBK, he thinks it justifies a Bt11.1/sh premium or Bt64.25/sh. Anything above that would feasibly be value destroying.
• In terms of benefits, Thanachart has a higher ROE than TMB and appears smaller but better managed. The merger would allow TMB to re-enter the securities business (more cross-selling), enlarge its asset management franchise, and scale up the deposit base for both banks. 

(link to Athaporn’s insight: Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?)  

Nexon Co Ltd (3659 JP) (Mkt Cap: $11.4bn; Liquidity: $33mn)

Reportedly Nexon’s founder Kim Jung-Joo and other related parties plan to sell their 98.64% stake in NXC Corp, which owns a 47.98% stake in Nexon.  Nexon has a market cap of $11.6bn but the rumoured price tag for the 47.98% take is $8.9bn implying a significant management premium.

• Given the size of this acquisition, the two leading Korean game companies including NCsoft Corp (036570 KS) and Netmarble Games (251270 KS) are not expected to bid. Douglas Kim believes the leading contender to buy Nexon right now is likely to be Tencent Holdings (700 HK). 

(link to Douglas’ insight: Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?)  

Faroe Petroleum (FPM LN) (Mkt Cap: $721mn; Liquidity: $5.5mn)

Initially launched as a voluntary conditional Offer late November,  DNO ASA (DNO NO) crept over 30% in Faroe this week and is now required to launch an MGO. The Offer price remains the same at GBP 1.52/share, however, the acceptance condition falls to 50% from 57.5% previously.

• Faroe’s pushback on the Offer – that the 21% premium offered to pre-announcement price is only “about half the average premium paid on all UK takeovers over the last 10 years” – is disingenuous.  DNO built a 27.68% stake in a matter of days back in April 2018, clearly telescoping that a full-blown Offer was a possibility (although denying it at the time). The unaffected price prior to the acquisition of that stake should be used as a reference point for the current Offer. This translates to a 44.8% premium.
• DNO has 43.1% in the bag, close to the 50% needed. There are investors (like Cavendish, holding 1.38%) who side with Faroe saying that the Offer is too low. With shares trading through terms, my bet is that DNO may need to kiss this offer, say 5-10%, to get it over the line. 

(link to my insight: DNO Closes In On Faroe)  

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

Curtis Lehnert recommends closing out the set-up trade, now that he sees the stub having reverted to its long-term average level. Since his recommendation, the trade has made a notional gain of 5% in a two and a half month time span.  As an aside I back out a discount to NAV of 21%, off its recent low of ~28% in early Nov, and compares to a 12-month average of 19%.

(link to Curtis’ insight: Jardine C&C (JCNC SP): Close the Stub Trade)

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

Back in September, I discussed in StubWorld: Matheson Unloads JLT, Unwind Takara that Matheson may use the net proceeds of £1.7bn (US$2.2bn) from selling its 40.16% stake in Jardine Lloyd Thompson Group P (JLT LN) into Marsh & Mclennan Cos (MMC US)‘s Offer, towards increasing its stake in JS, as there was/is still some room before the maximum 85% ownership level was reached. This is what happened (or at least a token amount of the proceeds), with Matheson buying ~2.5mn shares in Strategic for ~US90mn in early October. Matheson now holds a little less than 84% by my calculation – the group unhelpfully states it holds 84% without going into decimal places.  

• After touching a 17-year low ratio level of 1.41x (JM/JS) last September, that has blown out to 1.83x, having closed the year at 1.89x, a two-and-a-half year high, and compares to the long-term average of 1.7x.
• Strategic continues to trade “cheap” at ~44% discount to NAV, adjusted for the cross-holding. The spread between Matheson and Strategic is around its widest inside a year. Furthermore, as Matheson increased its stake, Strategic also acquired shares in Matheson earlier last year. Both elevate the cross-holding, which in principle you would expect the two companies to become even more closely aligned.

• I’d recommend buying into Strategic for its attractive NAV discount and further share acquisitions from Matheson.

Stub Wrap

Using a basket of 40 Holdcos I constructed, the average NAV discount in 2018 steadily widened throughout the year. Elsewhere:

• Passive, tech-related and illiquid Holdcos widened most; while cross-border and property Holdcos were the best of the worst.  
• Illiquid, property, and passive Holdcos’ underperformance (or widening) was more pronounced in the first half. Tech Holdcos primarily widened in the second half.
• Worst performers (discount widening): In absolute % terms, United Co Rusal Plc (486 HK) and Asm International Nv (ASM NA) roughly shared the largest moves; while Dah Sing Financial (440 HK), First Pacific Co (142 HK), Genting Bhd (GENT MK) and Pasona Group (2168 JP) are trading at or near their 52-week wides and 52-week low prices.
• Best performers (discount narrowing): China Conch Venture Holdings Ltd (586 HK) is the only Holdco in positive territory; while Japan Post Holdings (6178 JP) is trading closest to its narrowest level in the last 12 months.

(link to my insight: StubWorld: A 2018 Review In Charts)  

Briefly …

Nong Shim Holdings Co (072710 KS)‘s 32.72% stake in Nongshim Co Ltd (004370 KS) accounts for ~70% of its NAV. Sanghyun Park backs out a current discount to NAV of 54%, a 2-year low. Using his numbers, I see the Holdco at 2STD to the 12-month average. The problem is the parent’s liquidity or lack of it.
(link to Sanghyun’s insight: Nongshim Holdings Stub Trade: Time for Holdco To Catch Up) 

Ke Yan, CFA, FRM looked at the southbound flow for the month of December. Shandong Gold Mining Co Ltd (1787 HK) topped the list of Southbound inflow amongst the big cap names, followed by Shanghai Fosun Pharmaceutical (Group) (2196 HK) and Guangzhou Baiyunshan Phrmcl Hldgs (874 HK). In the mid-cap space, Yichang Hec Changjiang Pharm (1558 HK) saw a big increase of holdings by mainland investors, followed by  Greentown Service Group (2869 HK), Fullshare Holdings (607 HK) and Beijing Tong Ren Tang Chinese Medicine (3613 HK). 

(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Were Buying Pharma and Property Managers in December)  

• Takeda Pharmaceutical (4502 JP)  announced that the Royal Court of Jersey had sanctioned the Shire Scheme.

• The Barrick Gold (ABX US) / Randgold Resources (RRS LN) Scheme is now effective.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

• Source: HKEx

3. Forecasting the Semiconductor Market

This is the time of year that Objective Analysis releases its semiconductor forecast.  This post is based upon a video posted on the WeSRCH website that explains the Objective Analysis 2019 semiconductor forecast.

Although accurate semiconductor forecasts are straightforward to produce, the consistently-accurate methodology spelled out in this Insight is rarely used.

The forecast predicts that the downturn that the industry is currently entering will be longer than most, with profits eluding chip companies until 2022.

4. Big Trouble in Little Stocks? Maybe TSE Mulls Changing TOPIX

A Nikkei Asian Review article on 21 December titled  Tokyo Stock Exchange’s big board about to get a lot smaller suggesting the TSE would boot up to 1500 stocks from TOPIX, which now boasts 2130+ members – far more than major indices in other developed markets. 

Since November, a dedicated internal panel (“Advisory Group to Review TSE Cash Equity Market Structure”) has been addressing the issues, trying to make Tokyo’s stock market more attractive for international investors. Some of the proposals raised include a market cap cutoff of ¥50 billion or ¥100 billion of which there were on that date 1,000 companies and 620 companies respectively. 

The same day, the TSE released a  Consultation Paper “Review of the TSE Cash Equity Market Structure”. There is the Paper and the Data presentation which accompanies it. And the Consultation Paper invites public comments through 31 January (contact the Listing Department at [email protected]).

The introduction makes clear the goal. The part below is underlined in the original document.

Taking into account the role the market structure plays, it is important that TSE reviews the market structure in order to further incentivize listed companies to proactively improve their overall value as corporation, in addition to further attracting diverse global and domestic investors by providing attractive investment opportunities. Conducting a review of the market structure, with the aim of supporting the se roles, will further contribute to the development of a sustainable capital market, and by extension, the wider Japanese economy.

That paragraph tells you all you need to know.

It Has Been Decided That Something Must Be Done So Something Will Be Done.

The Consultation Paper and the Data presentation accompanying it discuss the current market structure (with four “listing” markets including the TSE1, TSE2, MOTHERS, and JASDAQ (including sub markets), making it clear that…

• biotech companies which need R&D capital should be allowed to list in order to raise capital, but pointing out that small companies which are already in existence for many years which list just because they want to are not 
• the requirements for reassignment from JASDAQ, MOTHERS or TSE2 to the First Section (the “step-up market” to which all major companies should aspire) are too low, and many companies which should not be admitted to the top ranks because of weak internal management structure or corporate governance end up there anyway,
• delisting requirements and procedures may not function properly and should be reviewed,
• the ability for shareholders to trade the “pink sheets”, “green sheets”, or delisted stocks is insufficient.
• the requirements for listing and liquidity on JASDAQ are insufficient.

I would note that the Consultation Paper does not address the ¥50 billion or ¥100 billion question.  The fact that the Nikkei does so tells you where they want to go with this. 

• The TSE is not suggesting that small companies shouldn’t be allowed to list. 
• The TSE clearly defines three types of companies – 1) risky companies without profits but great need for capital to grow, 2) established companies where capital need is lower and market investment may be made by more risk-averse investors, and 3) the “step-up market” – the big leagues.
• The Paper asks investors what should be the listing criteria for each group and the treatment of those companies which no longer meet the listing criteria. Then it asks about delisting criteria. 
• Effectively, the goal of making such changes to minimum market cap would be to…
  • make TOPIX (which is an index consisting of all members of the TSE First Section) a “better” index which would look more like the S&P500. That would make TOPIX more like the indices commonly used by foreign investors – such as MSCI Japan and FTSE Japan.
  • provide two markets for smaller companies – one for growth companies without profits or track record and one for established companies with a track record. 

The “Call for Comment” questions in each section point you to the overall conclusions and destination and ask you, the investor, what limits should be placed to light the way there. Investors with an interest in market structure should think about how best to respond.

• Should parent-controlled subsidiaries be allowed to list when the parent owns more than 50%?
• Should all TSE1 companies be required to release extensive company data and documentation online? in English?
• Should companies which breach the public trust through scandal – such as Seibu Rail, Kanebo, and Olympus years ago or Toshiba more recently – be permitted to stay listed? (Seibu and Kanebo were delisted, Olympus and Toshiba stayed listed)
• What constitutes a situation where delisting should be mandatory?

The language of the Paper and the way the Call for Comment questions are framed tells me the “results” are already known and the results of the Public Comment period will simply be flavoring.

There will be a three-tier market – something akin to MOTHERS, something akin to TSE2 for “established companies”, and something like the TSE First Section which will be beefed up (stricter criteria) and slimmed down (fewer companies). 

Whether governance is improved through limits on subsidiary holdings by parent companies, or criteria for independent directors, or more extensive documentation (and in English) is up to investors. If they make enough noise, this could happen. 

Most important for traders and investors are the market impacts from potential changes to TSE First Section. If the TSE mandates that listing requires companies to have a market cap of  ¥100 billion, the change…

1. will have a profound effect on the supply/demand metrics for a large number of companies. THAT will create dislocations.
2. possibly prompt consolidation over time. The limited ability of small companies to access TSE1 listing because of insufficient size or dollar value of daily liquidity may cause mergers.
3. could have profound effects on the Nikkei 225 if done right. 

5. Pasona Non-Grata

PASONA NON-GRATA

Source: Japan Analytics

ROUND TRIP – Temporary staffing company Pasona (2168 JP)‘s shares have completed a year-long ’round trip’ after reaching Overbought territory one year ago following the launch of an ‘engagement campaign’ by the activist investor, Oasis. In May 2018, the company took advantage of its elevated share price to sell 2.3m shares (of which 2m were Treasury Shares), prompting a sharp correction in the share price. In recent months, the shares have languished as the company’s business performance has begun to deteriorate, reaching an 18-month low of 1,008 on 25th December, before rebounding 12% to close the year at ¥1,126.

HOLDCO DISCOUNT – According to the Smartkarma HoldCo Monitor, Pasona has the largest ‘ListCo as a % of Market Cap’ percentage at 365%, and the second-largest ‘Discount to Net Asset Value’ (78%) of the 77 companies that are tracked. With Pasona’s interim results due to be released on Friday 11th, January, the Insight will look at the company’s recent business performance, offer some guidelines for valuing the company and make two stock-specific recommendations. The format follows that of our recent Insight on GMO Internet.