Daily Japan: Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon? and more

In this briefing:

1. Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?
2. Jardine C&C (JCNC SP): Close the Stub Trade
3. Japan: 2018 Sector Review – Down, Down, Deeper & Down
4. Japanese Banks:  These Lifeless Things (The Ozymandias Syndrome)
5. Jeans Mate Posts a Profit at Last

1. Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?

It was reported today that Nexon Co Ltd (3659 JP)’s founder Kim Jung-Joo plans to sell a controlling stake in Nexon’s holding company NXC Corp for at least 10 trillion won ($8.9 billion). Kim Jung-Joo and other related parties plan to sell their entire 98.64% stake in NXC Corp, which owns a 47.98% stake in Nexon. The 10 trillion won or more anticipated acquisition price for NXC Corp would include a significant management premium. Nexon Group’s shareholding structure is basically as follows: Kim Jung-Joo → Nexon (Japan) → Nexon Korea → About 10 affiliates. 

One of the reasons why the Nexon’s founder Kim Jung-Joo, who is only 50 years old, is trying to sell his entire stake in Nexon may have been due to the recent allegations about him giving about $380,000 worth of Nexon stock (prior to its listing) to his old high school classmate (who is now a senior public prosecutor) for free. Kim Jung-Joo has repeatedly faced allegations and attended numerous court hearings on this matter in the past two years. He may have gotten a bit tired from all these allegations. 

Given the enormous size of this acquisition, the two leading Korean game companies including NCsoft Corp (036570 KS) and Netmarble Games (251270 KS) are not likely to purchase Nexon. Rather, the leading contender to buy Nexon right now is likely to be Tencent Holdings (700 HK). The sheer huge size of this deal will represent one of the largest M&A deals in Asia in 2019. 

2. Jardine C&C (JCNC SP): Close the Stub Trade

In my original insight on October 17, 2018 TRADE IDEA – Jardine Cycle & Carriage (JCNC SP) Stub , I proposed setting up a stub trade to profit from volatility in the markets that caused the Jardine Cycle & Carriage (JCNC SP) stub to trade at a historically low discount to NAV. During the 78 calendar days that followed, Jardine Cycle & Carriage (JCNC SP) has gained 23% and the trade has made 5.03% on the gross notional. I now recommend closing the trade.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-mortem trade analysis on the JCNC stub

3. Japan: 2018 Sector Review – Down, Down, Deeper & Down

Source: Japan Analytics

DOWN, DOWN, DEEPER & DOWN – Japanese equities were as unfashionable as the venerable ‘Quo’ in 2018, although all of the year’s decline occurred in the fourth quarter. Our All-Market-Composite fell by 16.1%, only three sectors – REITs, Utilities and Telecoms – rose and four sectors – Metals, Building Materials, Technology Hardware and Machinery – fell by more than 30%. All of the sixteen outperforming sectors are domestically-orientated, and only two – Other Commercial Products and Other Consumer Products are manufacturing sectors. With no end in sight to the Bank of Japan’s accommodation, interest rates remained at historically-depressed levels and provided no respite to financial sectors. Construction and Building Materials declined as the pre-Olympic construction order cycle peaked out, although Real Estate outperformed as office vacancy rates and rents reached three-decade new lows and new highs, respectively. The largest fourth-quarter declines were in the Energy, Internet, Information Technology and Commercial Services sectors and now offer some attractive stock-specific opportunities.

4. Japanese Banks:  These Lifeless Things (The Ozymandias Syndrome)

Japanese bank stocks performed so poorly in 2018, with the Topix Bank Index falling 25.7% while the overall market declined by a lesser 16.4%, that some may be tempted to speculate that Japanese banks might be a key sector in leading a market recovery in 2019. We don’t think so. The fundamental outlook for banks’ profits remains clouded by a strengthening Yen against the US$, declining revenue growth, anaemic manufacturing sector loan demand, relentless downward pressure on net interest margins, weak fee business, rising valuation losses on both stocks and bonds, and ‘normalising’ credit costs. Simply put, there are no growth catalysts to drive the Japanese banking sector forward on a sustainable basis in terms of stock price appreciation. This all adds up to uninspiring valuations, even at current levels.  ‘Caveat emptor! (May the buyer beware!)’ remains our key recommendation to would-be investors in Japanese bank stocks for 2019.

5. Jeans Mate Posts a Profit at Last

While Rizap Group (2928 JP) has seen its share price crash and its CEO bow in apology after profit warnings and a plan to radically cut back on M&A, Jeans Mate Corp (7448 JP), which Rizap acquired last year, has quickly moved to modernise stores. It has just replaced its Shibuya store with a new concept called JEM that could mean the end of the Jeans Mate name altogether and posted its first operating profit in years. While many of Rizap’s acquisitions were dubious, Jeans Mate is one business that could be turned around into a modestly successful casual apparel retailer.