Japanese Turnaround Situations, Short-Ideas, Azabu Research

Michael Allen

Japanese Turnaround Situations, Short-Ideas

Azabu Research

Azabu Research is a publishing and consulting firm focused on distressed equities in the Japanese market. We specialize in turnaround strategies, corporate combinations, divestitures, and restructuring.

Publisher of the Tokyo Turnaround Letter, which conducts the most thorough research possible of publicly available information, including forensic tests for fraudulent overstatement of assets and understatement of liabilities, as well as rigorous market and industry analysis to assess the underlying strengths of the company’s products or services, the appropriateness of the company’s turnaround strategy, and the skill of its current management team. The average length of a report exceeds 25 pages of text and tables, excluding any disclosures or executive summaries.

We have more than 30 years of experience in applying this process to distressed equities in Japan. Additionally, subscribers have free access to detailed, yet easily navigated earnings models for the target company as well as the top five comparable companies, and unlimited access to the analyst for follow-up questions.

Azabu Research also conducts be-spoke research on a project basis, and provides consulting services to companies looking to restructure, divest, make acquisitions, go public, or improve investor sentiment toward their stock.

Independent Research and Consulting Firm

Equity Bottom-Up

KOBE BUSSAN CO., LTD. is a supermarket franchise store operator which mainly deals in foods stuffs.  The Company also has direct-run stores.

<ul>
<li>Kobe Bussan continues to hit new lows relative to the median Japanese retailer, as cheaper alternatives continue to rebound.</li>
<li>Kobe was one of the greatest beneficiaries in Japan of the Pandemic, but it is stuck at 10% growth which is no longer unusual. </li>
<li>Kobe's wholesale model makes it difficult to benefit from food price inflation like other food retailers. Kobe Bussan could drop another 50% before reaching fair value.</li>
</ul>


Kobe Bussan continues to hit new lows relative to the median Japanese retailer, as cheaper alternatives continue to rebound.
Kobe was one of the greatest beneficiaries in Japan of the Pandemic, but it is stuck at 10% growth which is no longer unusual. 
Kobe's wholesale model makes it difficult to benefit from food price inflation like other food retailers. Kobe Bussan could drop another 50% before reaching fair value.


Lasertec Corporation develops, designs, manufactures and markets photomask inspection systems to make semiconductor devices, confocal scanning laser microscopes and liquid crystal display (LCD) inspection systems.

<ul>
<li>Lasertec shares dropped nearly 8% following a scathing 53-page report by Scorpion Capital, accusing management of “colossal fraud.” </li>
<li>The SC report is shrill, in our view, and therefore, we think we add value by contributing a second opinion. </li>
<li>In our view, Lasertec is due for a correction even if SC’s report is inundated by hyperbole.</li>
</ul>


Lasertec shares dropped nearly 8% following a scathing 53-page report by Scorpion Capital, accusing management of “colossal fraud.” 
The SC report is shrill, in our view, and therefore, we think we add value by contributing a second opinion. 
In our view, Lasertec is due for a correction even if SC’s report is inundated by hyperbole.


Lasertec (6920): Some of the Accusations Are Disgraceful, Some Not

SUMITOMO CHEMICAL COMPANY, LIMITED manufactures chemical products.  The Company specializes in basic chemicals, petrochemicals, fine chemicals such as photo-resists, pharmaceutical intermediates, and agrochemicals.  Sumitomo Chemical operates manufacturing plants and sales offices worldwide.

<ul>
<li>Sumitomo Chemical issued new guidance in-line for 3/24 and xx% ahead of consensus for 3/25 EBIT, yet, the shares promptly declined by 10%.</li>
<li>Traders were probably spooked by the company’s booking of ¥340bn in impairments that was ¥200bn more than published consensus, but we argue that this was more than already priced in.</li>
<li>The only reasonable explanation for the reaction is that the market doesn't believe the new guidance for 3/25. This could prove to be a huge mistake.</li>
</ul>


Sumitomo Chemical issued new guidance in-line for 3/24 and xx% ahead of consensus for 3/25 EBIT, yet, the shares promptly declined by 10%.
Traders were probably spooked by the company’s booking of ¥340bn in impairments that was ¥200bn more than published consensus, but we argue that this was more than already priced in.
The only reasonable explanation for the reaction is that the market doesn't believe the new guidance for 3/25. This could prove to be a huge mistake.


Sumitomo Chemical (4005): To Believe Or Not To Believe, That Is the Question

TORIDOLL Holdings Corporation / Equity Bottom-Up

TORIDOLL Holdings Corporation operates a variety of restaurants such as skewered grill chicken, Japanese noodle, ramen noodle, Japanese-style pancake, and pasta restaurants.  The Company operates its business at food courts in shopping centers, stations, highway rest areas, and suburbs.

<ul>
<li>Macro trends for restaurant chains are all negative: Food prices rising faster than restaurant unit prices, part-time wages rising faster than full-time.</li>
<li>Toridoll’s same store sales resuming long-term underperformance trend that was broken only briefly during the pandemic.</li>
<li>Stock trades at 3x the market average PBR, despite merely average RoE. Technical support has broken down.</li>
</ul>


Macro trends for restaurant chains are all negative: Food prices rising faster than restaurant unit prices, part-time wages rising faster than full-time.
Toridoll’s same store sales resuming long-term underperformance trend that was broken only briefly during the pandemic.
Stock trades at 3x the market average PBR, despite merely average RoE. Technical support has broken down.


Toridoll (3397): Restaurant Chain on a Ledge

<ul>
<li>Sumitomo issued new guidance for the year to 3/25 that was 40% higher than consensus estimates, but the stock cratered almost 5%.</li>
<li>We were able to think of at least 6 explanations for this odd reaction - all of them irrational.  </li>
<li>A reasonable person listening to the call should have been pleased by almost all that was new information. </li>
</ul>


Sumitomo issued new guidance for the year to 3/25 that was 40% higher than consensus estimates, but the stock cratered almost 5%.
We were able to think of at least 6 explanations for this odd reaction - all of them irrational.  
A reasonable person listening to the call should have been pleased by almost all that was new information. 


Michael Allen is a representative director of Azabu Research, an independent research company focused on turnaround situations in the Japanese stock market. He has covered Japanese stocks for more than 30 years in both sell-side and buy-side roles and is fluent in both written and spoken Japanese.  He holds a degree in international studies from the University of Pacific, and certificates in corporate governance from both the Board Director Training Institute of Japan and the Wharton School of Business.