Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>In early February 2022, Silchester International Investors (according to its website) sent letters to four low-ROE-earning Japanese regional banks proposing a new dividend policy.</li>
<li>The management and boards of each bank rejected the policy proposal though two of the four had upped their proposed dividend or changed policy prior, and two upped it afterwards.</li>
<li>While Bank of Kyoto is the biggest equity portfolio, <a href="https://www.smartkarma.com/entities/chugoku-bank-ltd" target="_blank" data-smartkarma-citation="entities:11177:1" rel="noopener">Chugoku Bank (8382 JP)</a> is a relatively large, provincial, regional bank, with middling equity portfolio. Different shape. Different situation.</li>
</ul>


In early February 2022, Silchester International Investors (according to its website) sent letters to four low-ROE-earning Japanese regional banks proposing a new dividend policy.
The management and boards of each bank rejected the policy proposal though two of the four had upped their proposed dividend or changed policy prior, and two upped it afterwards.
While Bank of Kyoto is the biggest equity portfolio, Chugoku Bank (8382 JP) is a relatively large, provincial, regional bank, with middling equity portfolio. Different shape. Different situation.


JAPAN ACTIVISM: Silchester Goes After Chugoku Bank

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

The unexpected cut to FY3/2021 guidance announced by <a href="https://www.smartkarma.com/entities/gunma-bank-ltd" target="_blank" data-smartkarma-citation="entities:15777:1" rel="noopener">Gunma Bank (8334 JP)</a>, the dominant bank in Gunma Prefecture northwest of the Japanese capital Tokyo, is a reminder that the coronavirus pandemic continues to exact a heavy toll on Japanese industry, despite substantial efforts by the Japanese government and private commercial banks to support their clients wherever feasible.  Despite the likely dent in FY3/2021 earnings (to be formally announced in the next 2-3 weeks) caused by additional credit provisioning, we expect earnings to recover in FY3/2022.  The bank is maintaining its dividend unchanged at ¥13/share, suggesting a dividend payout ratio of around 45%.  On a prospective PER (using the bank’s revised guidance) of 12.5x and a low PBR of 0.31x, the stock remains attractive against peers.  We maintain our positive view on this stock.

The unexpected cut to FY3/2021 guidance announced by Gunma Bank (8334 JP), the dominant bank in Gunma Prefecture northwest of the Japanese capital Tokyo, is a reminder that the coronavirus pandemic continues to exact a heavy toll on Japanese industry, despite substantial efforts by the Japanese government and private commercial banks to support their clients wherever feasible.  Despite the likely dent in FY3/2021 earnings (to be formally announced in the next 2-3 weeks) caused by additional credit provisioning, we expect earnings to recover in FY3/2022.  The bank is maintaining its dividend unchanged at ¥13/share, suggesting a dividend payout ratio of around 45%.  On a prospective PER (using the bank’s revised guidance) of 12.5x and a low PBR of 0.31x, the stock remains attractive against peers.  We maintain our positive view on this stock.

Gunma Bank  (8334 JP):  Compressed Guidance

<a href="https://www.smartkarma.com/entities/chugoku-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:11177:1">Chugoku Bank (8382 JP)</a>, based in Okayama Prefecture in the Chugoku region of western Japan, is the 10th-largest Japanese regional bank in terms of market capitalisation.  It has a long-standing reputation for solid earnings thanks to conservative management and a strong financial position.  But, as the old Japanese proverb goes, even monkeys fall out of trees sometimes.  At first glance, things look fine: the bank is well-capitalised with a CAR of 13.62%, and interim results beat guidance convincingly.  Yet the bank has lowered its full-year forecast: one of only a handful of regional banks to do so when interim results were announced earlier this month.  Why?  Probably because interim results were still down 11% YoY, core earnings are down 24% YoY, the bank’s key net return on domestic funds deployed is now in negative territory, and credit costs are rising sharply.  Oh dear.  That reputation is looking distinctly undeserved these days.Make no mistake: not long ago, Chugoku Bank was an exceptionally strong bank. It may again be one some day.  Right now, however, the long-standing premium rating on its stock price (PER of 15.4x against a peer average of 10.9x) is unjustifiable given the deterioration in its core profitability.Foreign investors in aggregate continue to own just short of 17% of outstanding shares.  With Chugoku Bank’s performance ratios continuing to decline, its reputation for solid earnings in question, and in light of the recent profit warning for FY3/20 earnings from the bank, one wonders how long it will be before more foreign investors in Chugoku Bank head for the exits.  For those considering investing in this bank, perhaps unaware of the worrying deterioration in the bank’s basic domestic business but attracted by the disarmingly tantalising combination of strong capitalisation, high market share in its home prefecture, and a long history of conservative management, our advice is:  Caveat emptor!  (May the buyer beware!)

Chugoku Bank (8382 JP), based in Okayama Prefecture in the Chugoku region of western Japan, is the 10th-largest Japanese regional bank in terms of market capitalisation.  It has a long-standing reputation for solid earnings thanks to conservative management and a strong financial position.  But, as the old Japanese proverb goes, even monkeys fall out of trees sometimes.  At first glance, things look fine: the bank is well-capitalised with a CAR of 13.62%, and interim results beat guidance convincingly.  Yet the bank has lowered its full-year forecast: one of only a handful of regional banks to do so when interim results were announced earlier this month.  Why?  Probably because interim results were still down 11% YoY, core earnings are down 24% YoY, the bank’s key net return on domestic funds deployed is now in negative territory, and credit costs are rising sharply.  Oh dear.  That reputation is looking distinctly undeserved these days.Make no mistake: not long ago, Chugoku Bank was an exceptionally strong bank. It may again be one some day.  Right now, however, the long-standing premium rating on its stock price (PER of 15.4x against a peer average of 10.9x) is unjustifiable given the deterioration in its core profitability.Foreign investors in aggregate continue to own just short of 17% of outstanding shares.  With Chugoku Bank’s performance ratios continuing to decline, its reputation for solid earnings in question, and in light of the recent profit warning for FY3/20 earnings from the bank, one wonders how long it will be before more foreign investors in Chugoku Bank head for the exits.  For those considering investing in this bank, perhaps unaware of the worrying deterioration in the bank’s basic domestic business but attracted by the disarmingly tantalising combination of strong capitalisation, high market share in its home prefecture, and a long history of conservative management, our advice is:  Caveat emptor!  (May the buyer beware!)

'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. 

Quantitative Analysis

• RELATIVE PRICE SCORE •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/178/original/2019-09-06_09-42-35.png?1567730614" class="editor-image img-responsive" data-smartkarma-image-id="98178"></figure><div class="content-caption">Source: Japan Analytics</div>INTRODUCTION - The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are thus on a comparable scale, 'Overbought' and 'Oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. RPS outliers with a Score of greater than 10.0 are rare outside of the 2000 tech 'bubble'. <a href="https://www.smartkarma.com/entities/lasertec-corp" target="_blank" data-smartkarma-citation="entities:4126:1" rel="noopener">Lasertec (6920 JP)</a> has just joined <a href="https://www.smartkarma.com/entities/goldwin-inc" target="_blank" data-smartkarma-citation="entities:410:1" rel="noopener">Goldwin (8111 JP)</a> in being only the second large-cap RPS 'ten-baggers' in the last twenty years. <div class="content-highlight">This insight updates our list of Overbought and Oversold companies, reviews the best and worst-performing companies in terms of RPS over the last three months and adds some specific comments on stocks on each category.</div><div></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/046/original/2019-09-05_12-46-46.png?1567655232" class="editor-image img-responsive" data-smartkarma-image-id="98046"></figure><div class="content-caption">Source: Japan Analytics</div>STATISTICS - Currently, of the 3,706 listed companies for which monthly RPS data is available, 81 companies are 'Overbought', and 133 are 'Oversold' - 2.45% and 3.8%, respectively of the total. For the 737 companies with a market capitalisation of over ¥100b, there are 44 'Overbought' and 37 'Oversold' companies, 6% and 5%, respectively.<hr>• RELATIVE PRICE SCORE 'TOPS' •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/055/original/2019-09-05_13-06-30.png?1567656423" class="editor-image img-responsive" data-smartkarma-image-id="98055"></figure><div class="content-caption">Source: Japan Analytics</div>RPS 'TOPS' - In the last two years, 388 companies have achieved an RPS of '4' or more and the average Overbought 'persistence' is 42 days. 1.26% of the total of 1.94 million traded stock days were by companies with an RPS of over 4. For companies with a market capitalisation higher than ¥100b, the numbers are 95 companies and 74 days - demonstrating the superior persistence of large capitalisation companies in this regard. The chart above highlights the track record of all 95 large caps which are some point were Overbought in the last twenty-four months and illustrates the extreme outlier status of Goldwin and Lasertec.RPS NEGATIVE MEAN REVERSION - Some examples of RPS mean reversion in the last three months have been <a href="https://www.smartkarma.com/entities/suzuken-co-ltd" target="_blank" data-smartkarma-citation="entities:14996:1" rel="noopener">Suzuken (9987 JP)</a>, <a href="https://www.smartkarma.com/entities/infomart-corp" target="_blank" data-smartkarma-citation="entities:1301:1" rel="noopener">Infomart (2492 JP)</a>, <a href="https://www.smartkarma.com/entities/nichirei-corp" target="_blank" data-smartkarma-citation="entities:7168:1" rel="noopener">Nichirei (2871 JP)</a>, and <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl (4921 JP)</a>. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/096/original/2019-09-05_16-25-39.png?1567668352" class="editor-image img-responsive" data-smartkarma-image-id="98096"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/097/original/2019-09-05_16-27-09.png?1567668441" class="editor-image img-responsive" data-smartkarma-image-id="98097"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/098/original/2019-09-05_16-28-42.png?1567668548" class="editor-image img-responsive" data-smartkarma-image-id="98098"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/099/original/2019-09-05_16-30-29.png?1567668640" class="editor-image img-responsive" data-smartkarma-image-id="98099"></figure><div class="content-caption">Source: Japan Analytics</div><hr>• RELATIVE PRICE SCORE 'BOTTOMS' •<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/056/original/2019-09-05_13-12-52.png?1567656806" class="editor-image img-responsive" data-smartkarma-image-id="98056"></figure><div class="content-caption">Source: Japan Analytics</div>
</div>RPS 'BOTTOMS' - 259 companies have seen their RPS fall to '-2' or below in the last two years, and the average Oversold 'persistence' is 83 days. 1.46% of the total of 1.94 million traded stock days were by companies with an RPS of less than -2.  For larger capitalisation companies, the numbers are 79 companies and 94 days. The chart above highlights the track record of the 79 large caps which are some point were Oversold in the last twenty-four months and illustrates the strong recovery in the REITs Sector and the continuing demise of Regional Banks.RPS POSITIVE MEAN REVERSION - Some recent examples of positive RPS mean reversions are <a href="https://www.smartkarma.com/entities/otsuka-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:12292:1" rel="noopener">Otsuka Holdings (4578 JP) </a>and <a href="https://www.smartkarma.com/entities/line-corp" target="_blank" data-smartkarma-citation="entities:22772:1" rel="noopener">LINE (3938 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/100/original/2019-09-05_16-35-47.png?1567668972" class="editor-image img-responsive" data-smartkarma-image-id="98100"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/098/102/original/2019-09-05_16-36-50.png?1567669047" class="editor-image img-responsive" data-smartkarma-image-id="98102"></figure><div class="content-caption">Source: Japan Analytics</div>As we noted in our June <a href="https://www.smartkarma.com/insights/japan-relative-price-scores-overbought-oversold-companies-june-2019" target="_blank" data-smartkarma-citation="insights:30393" rel="noopener">Insight: -</a><blockquote><a href="https://www.smartkarma.com/entities/line-corp" target="_blank" data-smartkarma-citation="entities:22772:1" rel="noopener">LINE (3938 JP)</a>- Line has performed poorly since being featured in last year's Sohn Conference and has had negative and worsening Operating Income for each of the previous five quarters. Although there is a possibility of a double-bottom RPS 'bounce' and the company is now the most-Oversold non-financial large-cap over one year, there are no fundamental reasons to own the shares.   </blockquote>In the DETAIL section below, we list the current Very Overbought (RPS&gt;5), Too-Late-To-Buy (RPS &gt;4&lt;5) and Oversold (RPS &lt;-2) stocks as well as the most substantial three-month positive and negative changes in RPS.

• RELATIVE PRICE SCORE •Source: Japan AnalyticsINTRODUCTION - The Relative Price Score (RPS) is a measure of stock price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are thus on a comparable scale, 'Overbought' and 'Oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. Company outlier thresholds are set at +4 &amp; -2 and equate to the top and bottom first-to-second percentiles of historical observations from which mean reversion takes a matter of months. RPS outliers with a Score of greater than 10.0 are rare outside of the 2000 tech 'bubble'. Lasertec (6920 JP) has just joined Goldwin (8111 JP) in being only the second large-cap RPS 'ten-baggers' in the last twenty years. This insight updates our list of Overbought and Oversold companies, reviews the best and worst-performing companies in terms of RPS over the last three months and adds some specific comments on stocks on each category.Source: Japan AnalyticsSTATISTICS - Currently, of the 3,706 listed companies for which monthly RPS data is available, 81 companies are 'Overbought', and 133 are 'Oversold' - 2.45% and 3.8%, respectively of the total. For the 737 companies with a market capitalisation of over ¥100b, there are 44 'Overbought' and 37 'Oversold' companies, 6% and 5%, respectively.• RELATIVE PRICE SCORE 'TOPS' •Source: Japan AnalyticsRPS 'TOPS' - In the last two years, 388 companies have achieved an RPS of '4' or more and the average Overbought 'persistence' is 42 days. 1.26% of the total of 1.94 million traded stock days were by companies with an RPS of over 4. For companies with a market capitalisation higher than ¥100b, the numbers are 95 companies and 74 days - demonstrating the superior persistence of large capitalisation companies in this regard. The chart above highlights the track record of all 95 large caps which are some point were Overbought in the last twenty-four months and illustrates the extreme outlier status of Goldwin and Lasertec.RPS NEGATIVE MEAN REVERSION - Some examples of RPS mean reversion in the last three months have been Suzuken (9987 JP), Infomart (2492 JP), Nichirei (2871 JP), and Fancl (4921 JP). Source: Japan Analytics• RELATIVE PRICE SCORE 'BOTTOMS' •
Source: Japan Analytics
RPS 'BOTTOMS' - 259 companies have seen their RPS fall to '-2' or below in the last two years, and the average Oversold 'persistence' is 83 days. 1.46% of the total of 1.94 million traded stock days were by companies with an RPS of less than -2.  For larger capitalisation companies, the numbers are 79 companies and 94 days. The chart above highlights the track record of the 79 large caps which are some point were Oversold in the last twenty-four months and illustrates the strong recovery in the REITs Sector and the continuing demise of Regional Banks.RPS POSITIVE MEAN REVERSION - Some recent examples of positive RPS mean reversions are Otsuka Holdings (4578 JP) and LINE (3938 JP).Source: Japan AnalyticsAs we noted in our June Insight: -LINE (3938 JP)- Line has performed poorly since being featured in last year's Sohn Conference and has had negative and worsening Operating Income for each of the previous five quarters. Although there is a possibility of a double-bottom RPS 'bounce' and the company is now the most-Oversold non-financial large-cap over one year, there are no fundamental reasons to own the shares.   In the DETAIL section below, we list the current Very Overbought (RPS&gt;5), Too-Late-To-Buy (RPS &gt;4&lt;5) and Oversold (RPS &lt;-2) stocks as well as the most substantial three-month positive and negative changes in RPS.

🇯🇵 Japan • September Relative Price Scores - Life at the Poles Part 2: Companies

Based in Shimane Prefecture, in the Chugoku region of western Honshu, <a href="https://www.smartkarma.com/entities/6515" target="_blank" data-smartkarma-citation="entities:6515:1">San In Godo Bank (8381 JP)</a>  is unique among Japan’s 64 regional banks in being the Designated Financial Institution (DFI) for not just one but two prefectures: Shimane and neighbouring Tottori.  Long-considered a sleepy, conservatively-run bank from a backwater prefecture, San’In Godo Bank has quietly expanded its franchise over the last 20 years and now operates in seven prefectures including Hiroshima, Okayama and Hyogo prefectures in addition to its home market of Shimane and Tottori prefectures.
Trading on a PER of 10.6x (using the bank’s FY3/2019 guidance) and a PBR of 0.39x, the stock is inexpensive against the rest of the market but mid-priced against peers in a sub-sector that has for long seemed suspiciously underpriced. The stock is down just over 11% within the last six months, so has marginally outperformed against most other Japanese bank stocks in an otherwise difficult market, and may be forming a base at current levels.  For small-cap funds looking for exposure to the Japanese financial sector at a reasonable price, we believe this stock is worth considering.

Based in Shimane Prefecture, in the Chugoku region of western Honshu, San In Godo Bank (8381 JP)  is unique among Japan’s 64 regional banks in being the Designated Financial Institution (DFI) for not just one but two prefectures: Shimane and neighbouring Tottori.  Long-considered a sleepy, conservatively-run bank from a backwater prefecture, San’In Godo Bank has quietly expanded its franchise over the last 20 years and now operates in seven prefectures including Hiroshima, Okayama and Hyogo prefectures in addition to its home market of Shimane and Tottori prefectures.
Trading on a PER of 10.6x (using the bank’s FY3/2019 guidance) and a PBR of 0.39x, the stock is inexpensive against the rest of the market but mid-priced against peers in a sub-sector that has for long seemed suspiciously underpriced. The stock is down just over 11% within the last six months, so has marginally outperformed against most other Japanese bank stocks in an otherwise difficult market, and may be forming a base at current levels.  For small-cap funds looking for exposure to the Japanese financial sector at a reasonable price, we believe this stock is worth considering.

San'In Godo Bank (8381 JP): From Out of the Shadows

Japan

The Chugoku Bank, Limited is a regional bank based in Okayama prefecture.  The Bank provides banking services such as deposits, loans, and exchange transactions.  The Chugoku Bank also provides other financial services including securities brokerage, trust banking, credit cards, leasing, and investment advisory services.

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Chugoku Bank (8382 JP)

JAPAN ACTIVISM: Silchester Goes After Chugoku Bank

Silchester's letter to Chugoku Bank is similar to the others, but rejection count/order is different. A small ask on a large balance sheet but...

Travis Lundy

Gunma Bank (8334 JP): Compressed Guidance

The surprise cut to FY3/2021 guidance announced by Gunma Bank (8334 JP) is a reminder that the pandemic continues to take a heavy toll on Japanese...

J. Brian Waterhouse