Daily Japan: Nissan/Renault: French State Intervention Continues and more

In this briefing:

1. Nissan/Renault: French State Intervention Continues
2. The GER Weekly EVENTS Wrap: Softbank, Xiaomi, Capitaland and Navitas
3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
4. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector
5. Japan: Fortnightly Update – Nidec Leads the Way

1. Nissan/Renault: French State Intervention Continues

This past week saw some interesting news out of the ongoing saga of governance and control that is the Renault SA (RNO FP)Nissan Motor (7201 JP) Alliance. 

• A week ago, former Nissan Chief Performance Officer and onetime potential successor to Ghosn and/or Saikawa-san – Jose Munoz – who was put on leave to help Nissan deal with its internal investigation – resigned effective immediately. Some suggest this is the start of a bloodbath of Ghosn loyalists.
• Former Nissan CEO and still-CEO at Renault Carlos Ghosn was in court to appeal the decision to not allow him bail. I expect that will end up at the Supreme Court in not too long, but for the moment he might stay in detention for another 7-8 weeks.
• Nissan sources said (according to a Reuters report) earlier in the week they would be looking to file suit for damages against Ghosn.
• Nissan and Mitsubishi officially announced Friday that as a result of a joint investigation by Nissan and Mitsubishi Motors (7211 JP) into the Nissan-Mitsubishi Alliance entity (Nissan Mitsubishi BV), it was discovered that “Ghosn entered into a personal employment contract with NMBV and that under that contract he received a total of 7,822,206.12 euros (including tax) in compensation and other payments of NMBV funds. Despite the clear requirement that any decisions regarding director compensation and employment contracts specifying compensation must be approved by NMBV’s board of directors, Ghosn entered into the contract without any discussion with the other board members, Nissan CEO Hiroto Saikawa and Mitsubishi Motors CEO Osamu Masuko, to improperly receive the payments.” Saikawa and Masuko were not informed and did not also get paid by the company. The NMBV entity will attempt to recoup the funds from Ghosn. Nissan and Mitsubishi are thinking of dissolving their Dutch alliance entity.
• The Nissan panel reviewing Nissan’s governance structure, made up of three independent directors and four external members, met for the first time Sunday. The proposals are due end-March, upon which the board will propose a new management system/structure for approval at the shareholder meeting at end-June 2019. The co-chair said in a comment after today’s meeting that Ghosn perhaps had questionable ethics.
• French business newspaper Les Echos carried an “exclusive” interview with Nissan CEO Hiroto Saikawa which was reasonably enlightening, or should have been from a French point of view. In the interview, Saikawa is adamant that he fully supports the Renault-Nissan Alliance saying that it was not just important but “crucial” and he “would do nothing to render it harm”, and that the French state’s stake in Renault “posed no problem at all” because the “French state does not impose in any way on Nissan.” Saikawa-san also noted that he had no intention of ridding Nissan of French/foreign employees.
• Renault Director Martin Vial visited Japan with French officials including Emmanuel Moulin – chief of staff to Bruno Le Maire, who is French Minister of the Economy – to meet with Hiroto Saikawa and Japanese officials Wednesday and Thursday. This trip was first reported by Le Figaro in the early hours of Wednesday morning (15 Jan) Asia time, and the point of the trip was reportedly to discuss the changes in governance at the top of Renault which might be coming – i.e. a new chairman as the French state and Renault’s independent directors appear to have decided that another two months of detention for Carlos Ghosn is enough to warrant a change even if they still presume his innocence in the charges brought in Japan. They were also to inquire after Ghosn’s case, though that seemed to have been secondary.
• As a sidebar to this trip, Bruno Le Maire came out Wednesday saying that the State had asked the Renault board to hold a board meeting to replace Ghosn, and said that the French state would leave it to Renault’s directors to choose, but also came out and said that  Cie Generale Des Etablissement MIchelin (ML FP) CEO Jean-Dominique Senard would be a great choice (though other suggestions are that he might take the role of Chairman as others note that Renault Interim CEO Thierry Bolloré’s role could be made permanent). His comments about Mr. Senard included those suggesting that Mr. Senard adheres to certain ideas of the “social responsibilities” of the company – ideas which Mr. Le Maire shares.

Mr Le Maire also said this week…

“Nous souhaitons la pérennité de l’alliance. La question des participations au sein de l’alliance n’est pas sur la table.”

Another quote from an article which came out Saturday night at midnight Paris time was similar. 

“Un rééquilibrage actionnarial, une modification des participations croisées entre Renault et Nissan n’est pas sur la table”, déclare Bruno Le Maire. “Nous sommes attachés au bon fonctionnement de cette alliance qui fait sa force.”   

Both quotes say “we” (the French state) seek for the Alliance to continue functioning in a stable manner and changes of the crossholding relationship or ownership rates between the companies were not on the table. 

The second appears to be a quote from the Journal du Dimanche (article linked above) which was probably conducted a day or two earlier – and it makes a reference to it having been conducted just after his return from Tokyo (it was not revealed earlier this week that he had made the trip with Mssrs. Vial and Moulin so this is something of a question mark). 

All of this was out by Friday. It was all very measured and reassuring. 

Then Sunday saw a bombshell dropped… again…

In the Nikkei and Bloomberg, it was revealed that the French visitors to Tokyo had informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. 

This is interesting for three reasons…

1. A holding company where the two companies stay listed does nothing that the Alliance does not do now except put a single board in place on top of both companies. That would be a Dutch Foundation structure. A holding company where one of the two companies loses its listing (because it is taken over) would require one of those companies lose a set of shareholders. 
2. A Dutch Foundation (which is effectively the same thing if the two companies stay listed) was an idea which a year ago in the previous kerfuffle last spring about merging was “not an option acceptable to the government” (Les Echos, 7-Mar-18)
3. This is, once again, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement as modified in December 2015. 

This is widely reported in English, Japanese, and French on Sunday. 

There is a conciliatory article in Bloomberg with a headline suggesting a French official (Le Maire) downplayed the French comments about a holding company, but that refers to the JDD article, which is probably days old and repeated the same comment he made publicly earlier this week, reported by Les Echos and Le Figaro about a lack of change in cross-holding, but a careful read of the timeline suggests his comments were made in France before someone leaked this to the Nikkei.

Saikawa-san was reported to have said this morning (Monday 21 Jan 2019) that he had not heard about this, but that now was not the time to consider revising capital ties.

One should note, once again, that this is not the CEO or independent Chairman of Renault saying this. It is not the board or Nissan saying this. It is the French state. 

What does this all mean?  What are the possibilities and ramifications? Read on…

2. The GER Weekly EVENTS Wrap: Softbank, Xiaomi, Capitaland and Navitas

Have nascent bull cases developed for maligned Softbank Group (9984 JP) and Xiaomi Corp (1810 HK)? In this version of the GER weekly events wrap, we asses an interesting debt tender for Softbank Group (9984 JP) which could portend action for the equity. Secondly, we review our long-standing negative stance on Xiaomi Corp (1810 HK) after a very poor recent run. Finally, we are hesitant on the Capitaland Ltd (CAPL SP) acquisition and think a bump is possible for Navitas Ltd (NVT AU)

The rest of our event-driven research can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression. 

4. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector

The recent negative sales in the Chinese auto industry and Nissan’s case of Carlos Ghosn removal could put additional pressure on the already thin margin of auto supplier industry. One of the Carlos Ghosn early contribution to Nissan was to cut cost and outsource the auto parts maker to a wide variety of suppliers including to Hanon Systems (018880 KS) . Nissan’s new management may want to undo some of Carlos Ghosn’ legacy including changing the selection criteria of parts supplier.

Hanon’s global peers also experienced a decrease in the inventory turnover and most of them have been priced at PER <10 but Hanon is still trading at 24x PER while its sales growth and profitability is still in low single digit? Facing the onset of the slowdown in the Chinese auto industry, won’t it be another headwind for Hanon Systems?

5. Japan: Fortnightly Update – Nidec Leads the Way

“I’ve been a manager for almost half a century, but this is the first time I’ve seen such a large single-month drop in orders for us. What we witnessed in November and December was just extraordinary.”

Nidec CEO – Shigenobu Nagamori

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Source: Japan Analytics

BEAR MARKET RALLY ON CUE – The bear market rally we envisaged has seen the Market Composite recover by nearly 5% this year and 10% from the Christmas Day low of ¥533t. Seven of the last nine trading days have been ‘up’, and the Bank of Japan dutifully intervened on one of the two ‘down’ days – January 16th. The US dollar has also retraced three-quarters of the ¥6.5 decline from December 26th to January as concerns over US-China relations temporarily subsided.   

5D RSI @75 – The 5-day Relative Strength Index is now at a level that suggests the bulk of this initial move is complete, and a consolidation can be expected in the weeks ahead as the majority of third-quarter earnings are released – particularly if, as we discuss further below, Nidec (6594 JP) has set a trend.

Source: Japan Analytics

VALUE TRADED RATIO – After reaching a three-month high of 64bps on 21st December, the Value Traded Ratio (value traded/total market value) has returned to below-trend levels for the last two days – another indicator of a coming pause in the uptrend.   

% ABOVE MOVING AVERAGE – The percentage of stocks trading above a weighted sum of five periods of moving averages has recovered to above ’20’ as measured by market value, although the stock count percentage is still below that level. We expect the pattern of 2016 to be replayed here, which suggests an ultimate ‘low’ in the summer of 2019. 

Source: Japan Analytics

TORAKU > 80 – On a further positive note, on Friday the 25-day Toraku advance-decline indicator finally recovered to above the ’80’ level, indicating that the December 25th ‘low’ is unlikely to be breached in the short term.

THE NIDEC CANARY – Despite the market’s nonchalant reaction to Nidec’s downward revision, the company’s revised forecasts have broader implications. For the first time since March 2017, forecasts for our Market Composite for Operating Income are now lower than the trailing-twelve-month (TTM) Operating Income. Also, the ‘gap’ between forecast Net Income and TTM Net Income is now ¥2.9t – the largest such gap in over ten years. Mr. Market is suggesting that Japanese corporate profits are due to fall by 18% on average, to the level last reached in the first quarter of 2017 – implying bottom-line declines of up to 50% for some key ‘global’ sectors such as Autos, Machinery, Chemicals, Electrical Equipment and Technology Hardware, which together comprise one-third of aggregate Net Income.

LEADING OR LAGGING? – Our cap-weighted Results & Revision Score bottomed at -2.55 in December 2016 and reached a two-decade high on 16th November 2017, two months before the market peak in January 2018. Since October last year, the market has been leading on the downside.  If we are to repeat the relatively-mild cyclical downturn of 2016, the Results & Revision Score will turn negative at the time of the full-year results and forecasts for the new fiscal year, which, for the majority of companies, will be released in May. We expect the market to retest the lows of April 2017 and December 2018 around that time. 

In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Nidec (6594 JP), Yaskawa Electric (6506 JP), Fancl (4921 JP), Shiseido (4911 JP), Kose (4922 JP), Familymart Uny (8028 JP), Fast Retailing (9983 JP), Olympus (7733 JP), Lixil (5938 JP), Nippon Paint (4612 JP), Hoya (7741 JP), Keyence (6861 JP), and Technopro (6028 JP) .