Brief TMT & Internet: MonotaRO (3064 JP): Slow March, Strong 1Q and more

In this briefing:

1. MonotaRO (3064 JP): Slow March, Strong 1Q
2. Yaskawa: Results Confirm Bottoming Out Despite Weakness, but the Stock Has Run Too Far
3. Japan Post Holdings – The Future Is Complex, But Interesting
4. So-Young (新氧) Pre-IPO Review – Au Naturel
5. StubWorld: Amorepacific Is “Cheap”, Again; Kingboard Cleans House

1. MonotaRO (3064 JP): Slow March, Strong 1Q

MonotaRO’s domestic (parent company) sales growth rate declined in March, but was up in 1Q as a whole. We expect no change to FY Dec-19 guidance when consolidated results are announced at the end of April. 

Parent company data for March show sales up 17.4% year-on-year in nominal terms, but up 23.3% when adjusted for the number of working days in the month. The adjusted figures for January and February were 30.5% and 26.6%. In the three months to March, adjusted sales were up 26.5% vs. 24.2% growth in 4Q of FY Dec-18 and 26.2% a year earlier. 

At ¥2,366 (Thursday, April 11, close), the shares are selling at 51x our estimate for FY Dec-19 and 44x our estimate for FY Dec-20. Price/sales multiples for the same two years are 4.5x and 3.9x. Projected valuations look high, but are on the low side of their recent historical ranges. Continuing double-digit growth should support the share price.

2. Yaskawa: Results Confirm Bottoming Out Despite Weakness, but the Stock Has Run Too Far

Yaskawa Electric (6506 JP) reported FY03/19 results yesterday where OP of ¥49.8bn missed guidance of ¥53bn (-6.0% miss) and consensus of ¥52.1bn. Guidance of ¥46.5bn OP for FY02/20 was light relative to consensus at ¥48.7bn and our own expectations for about ¥50bn in OP but we believe guidance looks a little conservative and consider it to be mostly in line. The main concern was 4Q orders which were down 17% YoY and 10% QoQ with both Motion Control and Robotics displaying weakness.

The company also announced a buyback of 0.76% of outstanding shares for ¥9bn which we feel is a little small and also somewhat poorly timed given the 50% rally in the stock price in the last three months.

3. Japan Post Holdings – The Future Is Complex, But Interesting

On 9 April 2019, after a press release by the Ministry of Finance saying that it had commenced the selection procedure for underwriters to assist on such a sale, the Nikkei carried an article  (Japanese-only) saying that the government would sell down a stake in Japan Post Holdings (6178 JP) from its current 60-odd percent to a level of “over one-third” (presumably a level relatively close to one-third and a share) which is the minimum ownership level mandated by the Postal Service Privatization Act.  The proceeds of the sale are designed to raise money for reconstruction related to the 2011 Tohoku Earthquake. 

Currently, the Ministry of Finance owns 2.5595 billion shares out of the 4.5bn shares outstanding which is 56.88%, but the company has 10.34% of its shares as treasury shares so the MoF has voting rights of 63.3%. Another Nikkei article suggested the news meant a maximum sale of approximately 1.06 billion shares out of those 2.56bn shares held to bring the position down to 1.5bn shares exactly.

Importantly, IF the government got down to the “one-third plus one share” level (or close enough to it), that would complete the required privatization by the government based on the formal legal terms of the Privatization Act.

At Tuesday’s close of ¥1,286/share, 1.06bn shares would be ¥1.36 trillion as an offer size less fees and a discount to the close.  The Japan Postal Service Privatization Act specified that the amount raised reach ¥4 trillion in total. The amount raised in sales so far is ¥2.8 trillion according to the Nikkei. That suggests the minimum acceptable price at which such an Offering could take place is around ¥1,160-1180. However, the word used in the Nikkei article is profit so despite the government’s very low accounting basis, it is possible that the minimum price would be closer to the current price, or it could even be higher.

In any case… it is important to note other factors here.

Pricing is a problem. The current price remains below the last two times the government tapped the market.

Making the deal attractive is a problem. JPH is required to continue to own 100% of the postal service and the 24,000 post office branches across the country. With the use of physical post services declining, JPH needs to have some profits elsewhere to support that. Those postal branches are to some degree supported by payments made by JPI and JPB for fair usage, but it is not enough. JPH needs to do some M&A and it has stated its policy includes more of it. The first round (buying Toll Holdings) did not go well. The second round of buying 7% of Aflac Inc (AFL US) is (I think) a great idea, but it doesn’t hit the income statement for a couple of years.

Buybacks at the JPI and JPB level raise EPS at those two entities. However, it doesn’t raise the level of EPS at the JPH level. For that, you need to reduce the denominator there too. 

Exactly how this works. There are reasons to suspect that any offering later this year would be substantially smaller than what the Nikkei says, and as described in my original pre-IPO pieces Japan Post Holdings: The post-IPO details make for interesting possibilities and JAPAN POST GROUP : Bookbuilding Said “Mixed” But Know Your Details, the longer-term “solutions” to then-visible “issues” were obvious.

HOWEVER, this is interesting news.

There is light at the end of the tunnel, and it is not a train. 

4. So-Young (新氧) Pre-IPO Review – Au Naturel

So-Young (SY US) is looking to raise US$150m in its upcoming IPO. The company filed its prospectus with the SEC on Monday.

The company operates online platforms (mobile, website, and WeChat mini program) for discovering, evaluating, and reserving medical aesthetic services in China. It helps medical aesthetic service providers acquire customers through user generated content and other creative content format.

In this insight, we will look at the company’s business model, analyze its financial and operating performance, review the competitive landscape and point out some questions for management.

5. StubWorld: Amorepacific Is “Cheap”, Again; Kingboard Cleans House

This week in StubWorld …

• Amorepacific Group (002790 KS)‘s discount to NAV veers towards its one-year wide level, however newsflow, liquidity and financial performance side with Amorepacific Corp (090430 KS).
• Kingboard Laminates Holdings (1888 HK)‘s more reasonable tilt for Kingboard Copper Foil Hldgs (KCF SP) has minimal bearing on the group, but one wonders when Elec & Eltek Int (ELEC SP) will similarly be taken out.

Preceding my comments on Amorepacific, Kingboard and other stubs, are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.