Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<p>Recent press in Korea has highlighted that the Financial Supervisory Service (FSS) investigation into alleged accounting fraud at <a href="https://www.smartkarma.com/entities/kt-g-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:9320:1">KT&amp;G Corporation (033780 KS)</a> may be concluded in the next few months. Short interest has already started to pick up as the stock moves lower.</p><p>In this Insight, we take a look at KT&amp;G's history, at the accounting issue in question, at recent precedents in Korea, and analyse the impact on the stock if it gets labelled as an administrative issue or is subject to a trading halt and a delisting review, and finally recommend a trade.</p>

Recent press in Korea has highlighted that the Financial Supervisory Service (FSS) investigation into alleged accounting fraud at KT&amp;G Corporation (033780 KS) may be concluded in the next few months. Short interest has already started to pick up as the stock moves lower.In this Insight, we take a look at KT&amp;G's history, at the accounting issue in question, at recent precedents in Korea, and analyse the impact on the stock if it gets labelled as an administrative issue or is subject to a trading halt and a delisting review, and finally recommend a trade.

KT&G: Where There Is Smoke, There May Be Fire

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Equity Bottom-Up

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/966/original/2020-02-20_07-38-18.png?1582151941" class="editor-image img-responsive" data-smartkarma-image-id="118966"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<p><strong>MINISTRY OF INFORMATION</strong> - <a href="https://www.smartkarma.com/entities/dentsu-inc" target="_blank" data-smartkarma-citation="entities:12434:1" rel="noopener">Dentsu (4324 JP)</a>, which was founded in 1901, had a long and less-than-illustrious history as a government propaganda outlet before 1945, which has been airbrushed out of the corporate history. Since the formation in 1955 of the Liberal Democratic Party, the LDP has been Dentsu's most important client. This close relationship has continued into the Internet era with the establishment of the party's 'Team Truth' initiative.  Dentsu has long held a virtual lock on advertising on broadcast media in Japan and plays a key role as a promoter/ organiser of major sporting and social events.</p>
<p><strong>TAINTED</strong> - In recent years, Dentsu's image has been tainted with allegations of bribery in connection with the awarding of the 2020 Olympic Games to Tokyo and the unfortunate suicide of a 24-year old female employee driven to 'death by overwork' which forced the LDP to change some of the labour laws that allowed the excessive unpaid 'overtime' practices that are rife in this industry in Japan.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/968/original/2020-02-20_07-44-21.png?1582152290" class="editor-image img-responsive" data-smartkarma-image-id="118968"></figure>
<div class="content-caption">Source • worldatlas.com</div>
<p><strong>GLOBAL FOOTPRINT</strong> - Following the acquisition of the Aegis Group in 2012 and numerous other blot-on deals, Dentsu is now the world's fifth-largest advertising company and boasts fo operating in over 145 countries and regions with 60% of revenues generated outside Japan and 44,069 employees based overseas - 70% of total headcount. The new digital era has been less than kind to Dentsu's business model, which focuses heavily on traditional media formats, especially free-to-air television broadcasting in Japan. At the same time, the newly-acquired businesses have less secure positions in their core markets compared to that of Dentsu in Japan. With the industry facing several existential challenges, the timing of Dentsu's global expansion was far from optimal. It will require considerable management flexibility to transition to a model more appropriate for the mobile age.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/970/original/2020-02-20_08-07-28.png?1582153678" class="editor-image img-responsive" data-smartkarma-image-id="118970"></figure>
<div class="content-caption">Source • Company</div>
<p><strong>TEAMING COMPANY</strong> - To meet these challenges Dentsu aims to transform itself into a new 'dentsu group' - a 'Teaming Company' with three strategic priorities:- </p>
<ul>
<li>
<strong>Growth</strong> in new markets utilising the groups 'diverse capabilities' to create 'integrated growth solutions'</li>
<li>Offering 'socially-driven <strong>Value</strong>' to society and consumers in response to 'social challenges'</li>
<li>Creating a '<strong>Team</strong>ing Platform' based on development collaboration and integration to allow employees to gain a 'deeper understanding'. </li>
</ul>
<p><strong>STRATEGY REVIEW</strong> - Dentsu has been acquiring a myriad of digital media companies in the hope that one or more of them might offer a 'magic bullet'. As a result, they are becoming increasingly dependent on data and data suppliers that will come under increasing regulatory scrutiny base on concerns over privacy. Terrestrial broadcasting still accounts for almost half of revenue and this 'bread-and-butter' business is rapidly becoming 'toast'. Similarly, their dependence on shiny creative best-guess intuition is increasingly outdated. Significant cultural gaps remain between the lifetime-employment-oriented domestic operation and the international business, which has only one board representative and one other Executive Officer. Dentsu has an exciting future as a consulting and marketing communications hybrid. At present, much of the former is given away for free, while the latter is spread over hundreds of business units. Perhaps the model of <a href="https://www.smartkarma.com/entities/japan-tobacco-inc" target="_blank" data-smartkarma-citation="entities:13498:1" rel="noopener">Japan Tobacco (2914 JP)</a> where JTI is a separate business run by no-Japanese executives based outside Japan might be a solution; however, the implied loss of 'control' would be a step too far given the company's antecedents.  </p>
<p><strong>BELOW BOOK</strong> - It remains to be seen if these platitudes will be enough to improve Dentsu's current business model. In the short-term, the company is retrenching in several formerly key markets such as China and has implemented draconian cost-cutting in its domestic operations. Although the stock is now trading below book value and has been on od the worst-performing large caps in Japan since peaking in July 2015, we find little reason for optimism. </p>
<div class="content-highlight">
<p><strong>In the DETAIL section below, we review Dentsu's business and financial performance, returns and cash flow and suggest an appropriate valuation using a residual income valuation model. We also offer some suggestions as to how the company might finally address its 21st-century challenges.</strong></p>
</div>


Source • Japan Analytics
MINISTRY OF INFORMATION - Dentsu (4324 JP), which was founded in 1901, had a long and less-than-illustrious history as a government propaganda outlet before 1945, which has been airbrushed out of the corporate history. Since the formation in 1955 of the Liberal Democratic Party, the LDP has been Dentsu's most important client. This close relationship has continued into the Internet era with the establishment of the party's 'Team Truth' initiative.  Dentsu has long held a virtual lock on advertising on broadcast media in Japan and plays a key role as a promoter/ organiser of major sporting and social events.
TAINTED - In recent years, Dentsu's image has been tainted with allegations of bribery in connection with the awarding of the 2020 Olympic Games to Tokyo and the unfortunate suicide of a 24-year old female employee driven to 'death by overwork' which forced the LDP to change some of the labour laws that allowed the excessive unpaid 'overtime' practices that are rife in this industry in Japan.

Source • worldatlas.com
GLOBAL FOOTPRINT - Following the acquisition of the Aegis Group in 2012 and numerous other blot-on deals, Dentsu is now the world's fifth-largest advertising company and boasts fo operating in over 145 countries and regions with 60% of revenues generated outside Japan and 44,069 employees based overseas - 70% of total headcount. The new digital era has been less than kind to Dentsu's business model, which focuses heavily on traditional media formats, especially free-to-air television broadcasting in Japan. At the same time, the newly-acquired businesses have less secure positions in their core markets compared to that of Dentsu in Japan. With the industry facing several existential challenges, the timing of Dentsu's global expansion was far from optimal. It will require considerable management flexibility to transition to a model more appropriate for the mobile age.

Source • Company
TEAMING COMPANY - To meet these challenges Dentsu aims to transform itself into a new 'dentsu group' - a 'Teaming Company' with three strategic priorities:- 


Growth in new markets utilising the groups 'diverse capabilities' to create 'integrated growth solutions'
Offering 'socially-driven Value' to society and consumers in response to 'social challenges'
Creating a 'Teaming Platform' based on development collaboration and integration to allow employees to gain a 'deeper understanding'. 

STRATEGY REVIEW - Dentsu has been acquiring a myriad of digital media companies in the hope that one or more of them might offer a 'magic bullet'. As a result, they are becoming increasingly dependent on data and data suppliers that will come under increasing regulatory scrutiny base on concerns over privacy. Terrestrial broadcasting still accounts for almost half of revenue and this 'bread-and-butter' business is rapidly becoming 'toast'. Similarly, their dependence on shiny creative best-guess intuition is increasingly outdated. Significant cultural gaps remain between the lifetime-employment-oriented domestic operation and the international business, which has only one board representative and one other Executive Officer. Dentsu has an exciting future as a consulting and marketing communications hybrid. At present, much of the former is given away for free, while the latter is spread over hundreds of business units. Perhaps the model of Japan Tobacco (2914 JP) where JTI is a separate business run by no-Japanese executives based outside Japan might be a solution; however, the implied loss of 'control' would be a step too far given the company's antecedents.  
BELOW BOOK - It remains to be seen if these platitudes will be enough to improve Dentsu's current business model. In the short-term, the company is retrenching in several formerly key markets such as China and has implemented draconian cost-cutting in its domestic operations. Although the stock is now trading below book value and has been on od the worst-performing large caps in Japan since peaking in July 2015, we find little reason for optimism. 

In the DETAIL section below, we review Dentsu's business and financial performance, returns and cash flow and suggest an appropriate valuation using a residual income valuation model. We also offer some suggestions as to how the company might finally address its 21st-century challenges.


4324 🇯🇵 Dentsu - The Teaming Company

Asia Pac ECM and Index Rebal, Shenton Research

Ke Yan, CFA, FRM

Asia Pac ECM and Index Rebal

Asia Pac IPO & Placement Research, China Biotech

DZT Research

DZT Research is an independent Asia Pacific equity specialist. Our quantitative research covers index rebalancing flows, alongside exchange data analytics accross Asia Pacific. On the equity capital markets side, we focus on Asia Pacific ECM, especially biotech and TMT. Our lead analyst is frequently cited by international media.

Equity Capital Markets

Smoore International / Equity Capital Markets

<p>Smoore Tech is a leading e-cigarette and component manufacturer in China. The company was delisted from the venture board in China, the NEEQ, and is seeking a listing in Hong Kong to raise up to USD 400 million. In our previous note, we have looked at the company's background, its brief financials, and its shareholders. We are impressed by the company's stellar growth in the past and its technology-driven business. </p><p>We also look at the latest regulatory landscape on e-cigarettes in the company’s main market, the US and China. We think the FDA’s deadline for pre-marketing approval in 2020, even if pushed forward, will not present a major problem to the company’s blue-chip clients. Looking at the development in China, we also believe that the e-cigarette will likely be regulated in a similar manner as it is in the US. There might be short term hiccups but a regulatory framework that benefits the general public is long term positive for the e-cigarette industry.</p><div><h2>Our previous coverage on Smoore International</h2></div><div><ul>
<li><a href="https://www.smartkarma.com/insights/smoore-tech-pre-ipo-6y-and-1h2019-financials-show-technology-driven-growth" target="_blank" rel="noopener">Smoore Tech (麦克韦尔) Pre-IPO: 6Y and 1H2019 Financials Show Technology Driven Growth</a></li>
<li><a href="https://www.smartkarma.com/insights/smoore-tech-ipo-hidden-e-cigarette-player-behind-the-feelm-technology" target="_blank" rel="noopener">Smoore Tech (麦克韦尔) IPO: Hidden E-Cigarette Player Behind the FEELM Technology</a></li>
<li><a href="https://www.smartkarma.com/insights/smoore-pre-ipo-on-the-ground-visit-revealed-five-risks-in-china-market" target="_blank" rel="noopener">Smoore (麦克韦尔) Pre-IPO: On-The-Ground Visit Revealed Five Risks in China Market</a></li>
<li><a href="https://www.smartkarma.com/insights/smoore-intl-pre-ipo-tripling-capacity-in-three-years" target="_blank" rel="noopener">Smoore Intl (思摩尔国际) Pre-IPO: Tripling Capacity in Three Years</a></li>
</ul></div>

Smoore Tech is a leading e-cigarette and component manufacturer in China. The company was delisted from the venture board in China, the NEEQ, and is seeking a listing in Hong Kong to raise up to USD 400 million. In our previous note, we have looked at the company's background, its brief financials, and its shareholders. We are impressed by the company's stellar growth in the past and its technology-driven business. We also look at the latest regulatory landscape on e-cigarettes in the company’s main market, the US and China. We think the FDA’s deadline for pre-marketing approval in 2020, even if pushed forward, will not present a major problem to the company’s blue-chip clients. Looking at the development in China, we also believe that the e-cigarette will likely be regulated in a similar manner as it is in the US. There might be short term hiccups but a regulatory framework that benefits the general public is long term positive for the e-cigarette industry.Our previous coverage on Smoore International
Smoore Tech (麦克韦尔) Pre-IPO: 6Y and 1H2019 Financials Show Technology Driven Growth
Smoore Tech (麦克韦尔) IPO: Hidden E-Cigarette Player Behind the FEELM Technology
Smoore (麦克韦尔) Pre-IPO: On-The-Ground Visit Revealed Five Risks in China Market
Smoore Intl (思摩尔国际) Pre-IPO: Tripling Capacity in Three Years


Smoore Intl (思摩尔国际) Pre-IPO: Thoughts on E-Cig Regulation

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<ul><li><ul>
<li>As youth vaping became a trend and the term “Juuling” became a part of American high school life, Juul became the most popular e-cigarette in the US with over 70% market share.</li>
<li>JUUL Labs, the producer of Juul, is an American e-cigarette company with over $2.0bn in revenue.</li>
<li>The success of Juul in the e-cigaratte market even attracted the interest of Altria, who sells Marlboro and many other cigarette brands in the US.</li>
<li>Altria acquired a 35% stake in Juul Labs for $12.8bn on December 20, 2018, giving Juul Labs a valuation of more than $36.0bn</li>
<li>Juul Labs and Altria’s honeymoon was over even before it started as adults, health and safety organisations and politicians became increasingly concerned about the “Juuling” epidemic within teenagers in the US.</li>
<li>According to the company, Juul is about giving adult smokers a less harmful alternative to cigarettes. It also insists that it never marketed or knowingly sold its trendy e-cigarettes and flavoured nicotine pods to teenagers. But in reality, Juul was never about helping the adult smokers as it turned a blind eye as to who is purchasing its e-cigarettes and nicotine pods.</li>
<li>Since Juul Labs ignored the fact that Juul and teenage vaping has become an epidemic, its success was short lived. The company is now buried under a mountain of investigations, subpoenas and lawsuits.</li>
<li>Towards the end of last year, Juul announced that it will cut 650 jobs, freeze hiring and stop broadcast, print and digital advertising for its products. These initiatives are expected to save around $1.0bn of costs in 2020.</li>
<li>Under these circumstances, Juul’s valuation was cut 35% by Altria and certain unidentified sources suggest that Juul itself has decreased the valuation to $24.0bn. The initial investors such as Tiger Global and Fidelity Investments have also decreased their valuations of the company by more than 50%. ($19.0bn and $16.4bn respectively).</li>
<li>Now, Juul is kept on a short leash by the US regulatory bodies and as a result it had to suspend sales of its non-tobacco, non-menthol-based flavours in the US.</li>
<li>Amidst these bans, Juul was pushing to enter new markets in Europe, the Middle East, Africa, South America and Asia.</li>
<li>However, it was reported last week that Juul was pulling back from overseas expansion and we believe Juul’s troubles in the US market plays into the hands of other vaping brands such as Japan Tobacco’s Logic and Ploom.</li>
</ul></li></ul>


As youth vaping became a trend and the term “Juuling” became a part of American high school life, Juul became the most popular e-cigarette in the US with over 70% market share.
JUUL Labs, the producer of Juul, is an American e-cigarette company with over $2.0bn in revenue.
The success of Juul in the e-cigaratte market even attracted the interest of Altria, who sells Marlboro and many other cigarette brands in the US.
Altria acquired a 35% stake in Juul Labs for $12.8bn on December 20, 2018, giving Juul Labs a valuation of more than $36.0bn
Juul Labs and Altria’s honeymoon was over even before it started as adults, health and safety organisations and politicians became increasingly concerned about the “Juuling” epidemic within teenagers in the US.
According to the company, Juul is about giving adult smokers a less harmful alternative to cigarettes. It also insists that it never marketed or knowingly sold its trendy e-cigarettes and flavoured nicotine pods to teenagers. But in reality, Juul was never about helping the adult smokers as it turned a blind eye as to who is purchasing its e-cigarettes and nicotine pods.
Since Juul Labs ignored the fact that Juul and teenage vaping has become an epidemic, its success was short lived. The company is now buried under a mountain of investigations, subpoenas and lawsuits.
Towards the end of last year, Juul announced that it will cut 650 jobs, freeze hiring and stop broadcast, print and digital advertising for its products. These initiatives are expected to save around $1.0bn of costs in 2020.
Under these circumstances, Juul’s valuation was cut 35% by Altria and certain unidentified sources suggest that Juul itself has decreased the valuation to $24.0bn. The initial investors such as Tiger Global and Fidelity Investments have also decreased their valuations of the company by more than 50%. ($19.0bn and $16.4bn respectively).
Now, Juul is kept on a short leash by the US regulatory bodies and as a result it had to suspend sales of its non-tobacco, non-menthol-based flavours in the US.
Amidst these bans, Juul was pushing to enter new markets in Europe, the Middle East, Africa, South America and Asia.
However, it was reported last week that Juul was pulling back from overseas expansion and we believe Juul’s troubles in the US market plays into the hands of other vaping brands such as Japan Tobacco’s Logic and Ploom.


JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<p><a href="https://www.smartkarma.com/entities/shenzhen-smoore-technology" target="_blank" data-smartkarma-citation="entities:28241:1" rel="noopener">Shenzhen Smoore Technology (0959165D CH)</a> is the world’s largest vaping device manufacturer as measured by revenue, accounting for 10.1% of the total market share, in 2018, according to Frost &amp; Sullivan. It is seeking is raise $500 million through a Hong Kong in 1Q20.</p><div class="content-highlight"><p>The industry is currently mired in regulatory uncertainty, but clarity is slowly emerging. While harsher regulations remain an overhang, we think that recent events have lowered the incremental regulatory risk, which could make Smoore an attractive opportunity for investors with higher risk appetite. Setting aside the ongoing regulatory uncertainty, Smoore has the hallmarks of a well-run business.</p></div>

Shenzhen Smoore Technology (0959165D CH) is the world’s largest vaping device manufacturer as measured by revenue, accounting for 10.1% of the total market share, in 2018, according to Frost &amp; Sullivan. It is seeking is raise $500 million through a Hong Kong in 1Q20.The industry is currently mired in regulatory uncertainty, but clarity is slowly emerging. While harsher regulations remain an overhang, we think that recent events have lowered the incremental regulatory risk, which could make Smoore an attractive opportunity for investors with higher risk appetite. Setting aside the ongoing regulatory uncertainty, Smoore has the hallmarks of a well-run business.

Smoore IPO Initiation: Into the Vaping Zone

Japan

Japan Tobacco, Inc. operates as an tobacco product company. The Company manufactures, markets and sells cigarettes and other tobacco products internationally. Japan Tobacco is also engaged in pharmaceutical and food businesses.

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Japan Tobacco (2914 JP)

KT&G: Where There Is Smoke, There May Be Fire

Recent press in Korea has highlighted that the Financial Supervisory Service (FSS) investigation into alleged accounting fraud at KT&G...

Brian Freitas

4324 🇯🇵 Dentsu - The Teaming Company

MINISTRY OF INFORMATION - Dentsu (4324 JP), which was founded in 1901, had a long and less-than-illustrious history as a government propaganda...

Campbell Gunn

Smoore Intl (思摩尔国际) Pre-IPO: Thoughts on E-Cig Regulation

Smoore Tech is a leading e-cigarette and component manufacturer in China. The company was delisted from the venture board in China, the NEEQ, and...

Ke Yan, CFA, FRM

JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

As youth vaping became a trend and the term “Juuling” became a part of American high school life, Juul became the most popular e-cigarette in the...

Oshadhi Kumarasiri

Smoore IPO Initiation: Into the Vaping Zone

Shenzhen Smoore Technology (0959165D CH) is the world’s largest vaping device manufacturer as measured by revenue, accounting for 10.1% of the...

Arun George

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