In this briefing:
- Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019
- Japan: Ticking the Bear Market Boxes
- FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
- 2018 Was Not the Year for Value or Beta Names in Japan….
- Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships
1. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019
In a follow up to my note from last year Overview of My Winners and Losers in 2017…and 5 High Conviction Ideas Going into 2018 I again look at my stock ideas that have worked out in 2018, those that have not and those where the verdict is still pending.
Last year I provided 5 high conviction ideas and here is their performance in a brutal year for Asian Stock Markets:
Company | Share Price 27 Dec 2017 | Share Price 20 December 2018 | Dividends | % Total Return |
0.70 HKD | 0.88 HKD | 0.01 HKD | +27% | |
0.20 SGD | 0.27 SGD | 0.0 SGD | +35% | |
2.39 HKD | 2.82 HKD | 0.147 HKD | +24% | |
0.84 SGD | 0.85 SGD | 0.02 SGD | +3.5% | |
1.44 MYR | 0.32 MYR | 0.0 MYR | -79% |
4 out of 5 had a positive performance.
Below I will make a new attempt to provide five high conviction ideas going into 2019.
2. Japan: Ticking the Bear Market Boxes
After the market action on Thursday, this Insight provides a brief rundown of the technical position of our Japan Market Composite. I would categorise the current state of play as ‘The End of the Beginning’ and, despite the potential of short-term rallies, would still advise caution for the first quarter as the impact of the slowdown in global trade feeds through into earnings.
3. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook.
Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in.
Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.
THEY GOT NOTHING.
I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners.
In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.
“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.
Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected.
The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.
There was a clearly-available trading strategy based on that.
The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).
4. 2018 Was Not the Year for Value or Beta Names in Japan….
We looked back and identified which factors drove the Japanese market in 2018. We found that Value, which is historically strong in Japan, did poorly and really the only investment styles/factors that did well were large-cap and names with a high percent of retail investors.
5. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships
- We’ve reviewed 10 companies in the sector. Of those, three are the consensus favorites of our Tokyo based panel of industry, financial and economics observers of the IR initiative over many years.
- Based on pachinko alone, the stocks of these companies are fully valued. Based on potential tailwind from a license award within 6 months, they could be vastly undervalued.
- Each of the three noted here brings strength to a bid less based on financials than corporate focus, outlook and experience in the field.
