In this briefing:
- Semiconductor WFE Outlook. Things Just Got Really Ugly
- Taisho Frontrunner to Acquire BMS’s French OTC Business
- Japan Pharma – Top Picks
- Japan Telcos: Generally Positive After Recent Meetings in Tokyo.
- Softbank Corp IPO – Trading Strategies
1. Semiconductor WFE Outlook. Things Just Got Really Ugly
SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.
Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year.
These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season.
There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.
2. Taisho Frontrunner to Acquire BMS’s French OTC Business
Event – Bristol Myers Squibb Co (BMY US)‘s French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b
Our Take
- If Taisho Pharmaceutical Holdin (4581 JP) indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
- UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
- Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products
Valuation
Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:
- Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
- Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
- Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)
Net, net we would maintain our EW rating and Fair Value estimate of ¥11,300 / share.
3. 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)
4. 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).
5. 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
