Daily Japan: Japan Pharma – Top Picks and more

In this briefing:

1. Japan Pharma – Top Picks
2. Japan Telcos: Generally Positive After Recent Meetings in Tokyo.
3. Softbank Corp IPO – Trading Strategies
4. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
5. Hitachi (6501 JP): A Bold but Risky Acquisition of ABB’s Power Grids

1. Japan Pharma – Top Picks

• While Gni Group Ltd (2160 JP) is our high risk-high return pick, Mitsubishi Tanabe Pharma (4508 JP)  is a contrarian call in anticipation of value accretive utilization of cash and Eq. (~40% of market cap.)
• Takeda Pharmaceutical (4502 JP) continues to remain our favourite pick from a medium to long term investment perspective
• Rest are event / catalyst driven trading ideas… (see attachment)

2. Japan Telcos: Generally Positive After Recent Meetings in Tokyo.

We recently met NTT Docomo (9437 JP)  NTT (Nippon Telegraph & Telephone) (9432 JP), KDDI (9433 JP), and Rakuten (4755 JP) in Tokyo. Softbank Group (9984 JP) was unavailable as they were IPO’ing Softbank Corp (KK)(9434 JP) which lists tomorrow (Wed). While revenue headwinds seem to be strengthening, Chris Hoare thinks that neither DoCoMo’s price cuts, nor Rakuten’s entry, are sufficient to trigger a meaningful reduction in profitability in the next few years. The industry plans substantial cost cuts which will offset much of the damage, while falling handset subsidies create a further tailwind. Dividend payout ratios are set to rise gradually, boosting their attraction to yield starved investors. Chris believes that the attractive shareholder return environment over the past 4-5 years remains intact. Stocks have been recovering from the news of DoCoMo’s planned price cuts with the Softbank KK IPO a catalyst for the perception of the other telcos. For KDDI in particular, the impact of DoCoMo’s price cuts will be offset by the roaming agreement with Rakuten and a possible increase in shareholder remuneration (dividends and buyback).

3. Softbank Corp IPO – Trading Strategies

Bloomberg reported Softbank Corp (9434 JP)‘s international bookbuild was 2 – 3x covered while retail offering was at almost 2x. There were other reports of bookrunners struggling to sell shares to retail investors.

In this insight, we will look at how peers and market have performed since bookbuild and provide a sensitivity table with implied valuations for different price points and thoughts on the price range for near-term trading. 

We have already covered most aspects of Softbank Corp (9434 JP) ‘s IPO in our previous insights:

• Valuation from a retail investor POV –  Softbank IPO Review – Attractive from a Retail Perspective, Could Provide Short-Term Upside
• Valuation from an institutional investor POV – Softbank Corp IPO Review – Yield Ensured Demand May Not Guarantee Performance
• Updates from prospectus – Softbank Corp IPO Review – Segment Breakdown, Capex, and Risks
• Operating metric comparison – Softbank Telecom Pre-IPO – Higher Yield to Compensate for Poorer Metrics
• Impact of Rakuten entry and FCF and dividend sustainability analysis – Softbank Telecom Pre-IPO – All About the Yield
• Company background and overview – Softbank Telecom Pre-IPO Review – Vision Is Needed to Arrive at US$90bn Valuation

4. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

5. Hitachi (6501 JP): A Bold but Risky Acquisition of ABB’s Power Grids

Hitachi Ltd (6501 JP) announced the acquisition of an 80.1% stake in ABB Ltd (ABBN VX)’s power grids business for $6.4 billion. ABB will retain the remaining stake in the divested unit, which is valued at an EV of $11 billion. ABB’s power grids is a global #1 player and makes transformers, long distance electricity-transmission systems and energy storage units.