Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Last Week in Event SPACE: China Youzan, Mcdonald's, Beijing Jingneng, Ricoh, Melco Resorts, LG Corp

Travis Lundy

Equity Bottom-Up

<p>The <a href="https://corp.cocokarafine.co.jp/english/ir/pdf/20210226_eng_03.pdf" target="_blank" rel="noopener"><strong>presentation</strong></a> provided by <a href="https://www.smartkarma.com/entities/matsumotokiyoshi-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:2259:1" rel="noopener">Matsumotokiyoshi Holdings Co., Ltd. (3088 JP)</a> and <a href="https://www.smartkarma.com/entities/cocokara-fine-inc" target="_blank" data-smartkarma-citation="entities:15447:1" rel="noopener">Cocokara Fine (3098 JP)</a> when they announced their Management Integration told of two major inputs to what is helping the stocks bounce today. </p>
<p>There is one other which has been implicit, but people did not appear to include it in their numbers.</p>
<p>There is yet another which is coincidental.</p>
<p>One of the two inputs - expected OP synergies - is probably a bit stronger than people expected. </p>
<p>The other one - the <em>Business Objective of the Group </em>- is obviously new, but perhaps should not be.</p>
<p>The initial discussion was carried in <a href="https://www.smartkarma.com/insights/matsukiyococokara-co-the-merger" target="_blank" data-smartkarma-citation="insights:48652" rel="noopener">MatsukiyoCocokara &amp; Co - The Merger</a> after a half dozen insights on the deal over the previous 18 months-plus (yes, we've been looking at this a long time).</p>
<p>Below, I break down how each of these inputs shows up in Revenue, OP, and NP based on consensus numbers, adjusted to NEWCO Group Totals and MatsuKiyo-equivalent Per Share Estimates, and historical seasonality to project a quarterly and running 4Q total Revenue, OP, NP, and EPS future consensus.</p>

The presentation provided by Matsumotokiyoshi Holdings Co., Ltd. (3088 JP) and Cocokara Fine (3098 JP) when they announced their Management Integration told of two major inputs to what is helping the stocks bounce today. 
There is one other which has been implicit, but people did not appear to include it in their numbers.
There is yet another which is coincidental.
One of the two inputs - expected OP synergies - is probably a bit stronger than people expected. 
The other one - the Business Objective of the Group - is obviously new, but perhaps should not be.
The initial discussion was carried in MatsukiyoCocokara &amp; Co - The Merger after a half dozen insights on the deal over the previous 18 months-plus (yes, we've been looking at this a long time).
Below, I break down how each of these inputs shows up in Revenue, OP, and NP based on consensus numbers, adjusted to NEWCO Group Totals and MatsuKiyo-equivalent Per Share Estimates, and historical seasonality to project a quarterly and running 4Q total Revenue, OP, NP, and EPS future consensus.

MatsuKiyoCocokara Merger and Implied Forward Forecasts

<p>On Friday after the close, <a href="https://www.smartkarma.com/entities/matsumotokiyoshi-holdings-co" target="_blank" data-smartkarma-citation="entities:2259:1" rel="noopener">Matsumotokiyoshi Holdings Co (3088 JP)</a> and <a href="https://www.smartkarma.com/entities/cocokara-fine-inc" target="_blank" data-smartkarma-citation="entities:15447:1" rel="noopener">Cocokara Fine (3098 JP)</a> announced the details of their Management Integration, including the scrip exchange ratio. </p><p>Earlier in the month I had written about the possibility of this announcement coming with earnings results but they waited until the last day of the month. </p><p>Since I wrote and since earnings, Cocokara has outperformed Matsukiyo - by 3.4% through Thursday and an additional 2.8% on Friday, but this late spurt was not really included in the ratio chosen by the two companies when they announced the terms at 1.0 shares of Cocokara per 1.7 share of Matsumotokiyoshi.</p><p>The merger is set to go through on 1 October after the AGMs for both companies are held 29 June to approve the deal. It will eventually end up as a holding company with operating subsidiaries. </p><p>There's a lot to think about here. </p><p>The numbers are reasonably compelling.</p>

On Friday after the close, Matsumotokiyoshi Holdings Co (3088 JP) and Cocokara Fine (3098 JP) announced the details of their Management Integration, including the scrip exchange ratio. Earlier in the month I had written about the possibility of this announcement coming with earnings results but they waited until the last day of the month. Since I wrote and since earnings, Cocokara has outperformed Matsukiyo - by 3.4% through Thursday and an additional 2.8% on Friday, but this late spurt was not really included in the ratio chosen by the two companies when they announced the terms at 1.0 shares of Cocokara per 1.7 share of Matsumotokiyoshi.The merger is set to go through on 1 October after the AGMs for both companies are held 29 June to approve the deal. It will eventually end up as a holding company with operating subsidiaries. There's a lot to think about here. The numbers are reasonably compelling.

<p>Just under two years ago, <a href="https://www.smartkarma.com/entities/cocokara-fine-inc" target="_blank" data-smartkarma-citation="entities:15447:1" rel="noopener">Cocokara Fine (3098 JP)</a> was being courted by multiple suitors, and in early Q3 after the Independent Review Committee decided to negotiate with <a href="https://www.smartkarma.com/entities/matsumotokiyoshi-holdings-co" target="_blank" data-smartkarma-citation="entities:2259:1" rel="noopener">Matsumotokiyoshi Holdings Co (3088 JP)</a> rather than <a href="https://www.smartkarma.com/entities/sugi-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:9255:1" rel="noopener">Sugi Holdings (7649 JP)</a>, it looked like a deal was forthcoming. However in early 2020, it was announced that the decision on a ratio was put off and the two companies agreed to a delayed-vs-expectations integration process.</p><p>Rather than push a deal forward at that moment, the two companies agreed at the end of January 2020 that MatsuKiyo would put up funds (which turned out to be ¥38.4bn) to buy shares of cocokara in a third-party placement of 20% of the company (<a href="https://corp.cocokarafine.co.jp/news/pdf/20200331_TD01.pdf" target="_blank" rel="noopener">completed 31 March</a>), and the two companies would work on a plan to introduce synergies, and then the ratio would be decided when management teams at both firms had a better idea of what effect the synergies might have on future management profit forecasts.</p><p>Subsequent earnings announcements have suggested that synergies have been found. </p><div>
<table class="table table-striped"><tbody>
<tr><td colspan="3" style="width: 724px;"><h2>The Schedule of the Integration</h2></td></tr>
<tr>
<td style="width: 128px;"><strong>Date</strong></td>
<td style="width: 330px;"><strong>Detail</strong></td>
<td style="width: 224px;"><strong>Comment</strong></td>
</tr>
<tr>
<td style="width: 128px;">31 Jan 2020</td>
<td style="width: 330px;">Business Integration &amp; Capital Alliance Announcement</td>
<td style="width: 224px;">The New Deal</td>
</tr>
<tr>
<td style="width: 128px;">31 Jan to 30 April 2020</td>
<td style="width: 330px;">Submission of Capital Alliance/Integration to JFTC, JFTC Approval, Cocokara Share Issuance, Equity Affiliate status</td>
<td style="width: 224px;">JFTC Approval, and investment made March 2020</td>
</tr>
<tr>
<td style="width: 128px;">THE NEXT YEAR</td>
<td colspan="2" style="width: 330px;"><p>The two companies will work on the synergies and discuss their vision, plans, etc, and come up with a Merger Ratio, which will be in part dependent on the new management profit forecasts built up after several months or a year's worth of effort at finding synergies.</p></td>
</tr>
<tr>
<td style="width: 128px;">Feb 2021</td>
<td style="width: 330px;"><p>Execution of definitive agreement related to the Business Integration</p></td>
<td style="width: 224px;">The Merger Ratio Announcement</td>
</tr>
<tr>
<td style="width: 128px;">June 2021</td>
<td style="width: 330px;"><p>Ordinary general meetings of shareholders of both companies (resolution regarding approval of the Business Integration)</p></td>
<td style="width: 224px;">The Approvals</td>
</tr>
<tr>
<td style="width: 128px;">1 Oct 2021</td>
<td style="width: 330px;"><p>Effective Date of the Business Integration</p></td>
<td style="width: 224px;">The Merger</td>
</tr>
</tbody></table>
<p>The cocokara/MatsuKiyo price ratio fell to 1.28 and that was a great time to buy. My trade recommendations on the ratio are marked in the chart below.</p>
<p>Then covid-19 effects knocked markets for a loop and the ratio dropped from 1.43 a month later to 1.20 in mid-March to 1.40 again at end-March as share prices fluctuated wildly. The ratio stabilized in the 1.37-1.43 range until end-May when the ratio jumped. It then moved up steadily to 1.80 last week before dropping to 1.76 where it was in September when I recommended buying both names, noting that Matsumoto Kiyoshi had underperformed its peers.</p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/186/347/original/Screenshot+2021-02-02+at+9.09.30+PM.png?1612271389" class="editor-image img-responsive" data-smartkarma-image-id="186347"></figure></section><p></p>
<p>The ratio has fallen since then but both stocks are up, MatsuKiyo up more.</p>
<h3>Where We Are Now</h3>
<p>Just over a week ago, on 22 January 2021, cocokara fine announced that because of the announcement of the state of emergency related to covid-19, workers and service providers working from home might experience some delay in preparing the financial releases and therefore the announcement of Q3 earnings would be put off from the regularly scheduled date of 29 January to 12 February 2021. The statement says no analyst meeting to discuss Q3 results will be held. </p>
<p><strong>A decision on the definitive agreement on Business Integration is due in February 2021.</strong></p>
<p>Now cocokara is releasing earnings on 12 February, and I believe one should expect Matsumoto Kiyoshi results on the same day. </p>
<p>Hmmm...</p>
</div>

Just under two years ago, Cocokara Fine (3098 JP) was being courted by multiple suitors, and in early Q3 after the Independent Review Committee decided to negotiate with Matsumotokiyoshi Holdings Co (3088 JP) rather than Sugi Holdings (7649 JP), it looked like a deal was forthcoming. However in early 2020, it was announced that the decision on a ratio was put off and the two companies agreed to a delayed-vs-expectations integration process.Rather than push a deal forward at that moment, the two companies agreed at the end of January 2020 that MatsuKiyo would put up funds (which turned out to be ¥38.4bn) to buy shares of cocokara in a third-party placement of 20% of the company (completed 31 March), and the two companies would work on a plan to introduce synergies, and then the ratio would be decided when management teams at both firms had a better idea of what effect the synergies might have on future management profit forecasts.Subsequent earnings announcements have suggested that synergies have been found. 

The Schedule of the Integration

Date
Detail
Comment


31 Jan 2020
Business Integration &amp; Capital Alliance Announcement
The New Deal


31 Jan to 30 April 2020
Submission of Capital Alliance/Integration to JFTC, JFTC Approval, Cocokara Share Issuance, Equity Affiliate status
JFTC Approval, and investment made March 2020


THE NEXT YEAR
The two companies will work on the synergies and discuss their vision, plans, etc, and come up with a Merger Ratio, which will be in part dependent on the new management profit forecasts built up after several months or a year's worth of effort at finding synergies.


Feb 2021
Execution of definitive agreement related to the Business Integration
The Merger Ratio Announcement


June 2021
Ordinary general meetings of shareholders of both companies (resolution regarding approval of the Business Integration)
The Approvals


1 Oct 2021
Effective Date of the Business Integration
The Merger


The cocokara/MatsuKiyo price ratio fell to 1.28 and that was a great time to buy. My trade recommendations on the ratio are marked in the chart below.
Then covid-19 effects knocked markets for a loop and the ratio dropped from 1.43 a month later to 1.20 in mid-March to 1.40 again at end-March as share prices fluctuated wildly. The ratio stabilized in the 1.37-1.43 range until end-May when the ratio jumped. It then moved up steadily to 1.80 last week before dropping to 1.76 where it was in September when I recommended buying both names, noting that Matsumoto Kiyoshi had underperformed its peers.

The ratio has fallen since then but both stocks are up, MatsuKiyo up more.
Where We Are Now
Just over a week ago, on 22 January 2021, cocokara fine announced that because of the announcement of the state of emergency related to covid-19, workers and service providers working from home might experience some delay in preparing the financial releases and therefore the announcement of Q3 earnings would be put off from the regularly scheduled date of 29 January to 12 February 2021. The statement says no analyst meeting to discuss Q3 results will be held. 
A decision on the definitive agreement on Business Integration is due in February 2021.
Now cocokara is releasing earnings on 12 February, and I believe one should expect Matsumoto Kiyoshi results on the same day. 
Hmmm...


Cocokara/​MatsuKiyo Deal Finally Coming?

Quantitative Analysis

<p>Long-time Japan strategist Jonathan Allum, most recently of SMBC Nikko, put a guest post titled <a href="https://www.ft.com/content/a97cf336-518d-45dd-8092-ec0363c18725" target="_blank" rel="noopener"><em>Takeaways from 30 years of Covering the Japanese Market</em></a> in the Financial Times on 26 November (Thanksgiving) which is well worth a read.</p><p>He points out that foreign investors in 2020 are likely going to be net dis-investors in Japan for the fourth year in five, fifth year in six, and increasing the net selldown which has occurred since the monster year in 2013. </p><section class="figure"><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/956/original/Screenshot%202020-11-29%20at%203.07.23%20PM.png?1606633655" class="editor-image img-responsive" data-smartkarma-image-id="174956"></figure></section><p>This data is compiled from the weekly data which shows each investor category. On a net basis across all investor categories, it will be flat because while it shows buybacks on market, crediting the "Business Corporations" category, it does not show the data of investors selling into Tender Offers or the data of investors buying from IPOs.</p></section><p>Of course, the data is not that clean because investing doesn't always happen according to calendar year decisions. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/969/original/Screenshot%202020-11-29%20at%203.40.57%20PM.png?1606635676" class="editor-image img-responsive" data-smartkarma-image-id="174969"></figure></section><p>It just so happens that the last two really big selloffs in dollar terms (both exceeding ¥6trln on a rolling 52wk basis) did not happen to see start and end points coincide with those of the Gregorian calendar.</p>
<p>There has been an interesting confluence of "lack of participation in the market" this year. After lifting ETF buys in March 2020, the BOJ has slowed down its ETF buying considerably in the past six months (the current 6-month total is near the lower end of the range seen in the past four years), buybacks are down this year as companies slowed their activity in the face of covid-19-induced uncertainty, and foreigners are net sellers. </p>
<p>Of course Japanese insurers are on the verge of extending what will be a 12-year streak of net sells to a 13th year, and it looks like Japanese banks will be extending their net selling to a 14th year in a row. Trust Banks will be net buyers for the sixth year in seven this year, but for at least the fourth year in a row it will be less than the net buying of ETFs by the BOJ so ex-BOJ trust banks will have been net sellers for several years. </p>
<p>Business corporations are up ¥1.335trln year-to-date through the 20th of November, and will almost certainly extend their streak to ten years on the buy side. The interesting net flow this year is the "Proprietary" flow at brokers. This is now positive for ten years in a row, and there are particular reasons for this, as discussed below.</p>
<p>Because of the noise around recent articles about the BOJ and foreign activity, I decided to once again dust off the long-term analytics on Japan investor class flows, and present them here. Because flows net off to close to zero (i.e. there are a certain number of shares, and if some investor class is a net seller, other investor classes must be net buyer(s)), deriving a model for behavior is useful.  Long ago, in roles in fixed income and equity derivatives strategy, I built models of net foreign buying, and they uniformly showed that foreign investors chase/push/drive performance. My final model is a multi-input model which provides a simple combination of two factors they chase.</p>
<p>This insight discusses those behavior models, investor class flow dynamics, cycles, and trends and pressures near-term.</p>
<p>The combination of the investor class flows, and the model which drives net foreign activity, is interesting. I think it helps because the top-down aspect matters for understanding allocation flow.</p>
<p>Read on for the nitty gritty (as usual, we start with Conclusions First).</p></section>

Long-time Japan strategist Jonathan Allum, most recently of SMBC Nikko, put a guest post titled Takeaways from 30 years of Covering the Japanese Market in the Financial Times on 26 November (Thanksgiving) which is well worth a read.He points out that foreign investors in 2020 are likely going to be net dis-investors in Japan for the fourth year in five, fifth year in six, and increasing the net selldown which has occurred since the monster year in 2013. This data is compiled from the weekly data which shows each investor category. On a net basis across all investor categories, it will be flat because while it shows buybacks on market, crediting the "Business Corporations" category, it does not show the data of investors selling into Tender Offers or the data of investors buying from IPOs.Of course, the data is not that clean because investing doesn't always happen according to calendar year decisions. 
It just so happens that the last two really big selloffs in dollar terms (both exceeding ¥6trln on a rolling 52wk basis) did not happen to see start and end points coincide with those of the Gregorian calendar.
There has been an interesting confluence of "lack of participation in the market" this year. After lifting ETF buys in March 2020, the BOJ has slowed down its ETF buying considerably in the past six months (the current 6-month total is near the lower end of the range seen in the past four years), buybacks are down this year as companies slowed their activity in the face of covid-19-induced uncertainty, and foreigners are net sellers. 
Of course Japanese insurers are on the verge of extending what will be a 12-year streak of net sells to a 13th year, and it looks like Japanese banks will be extending their net selling to a 14th year in a row. Trust Banks will be net buyers for the sixth year in seven this year, but for at least the fourth year in a row it will be less than the net buying of ETFs by the BOJ so ex-BOJ trust banks will have been net sellers for several years. 
Business corporations are up ¥1.335trln year-to-date through the 20th of November, and will almost certainly extend their streak to ten years on the buy side. The interesting net flow this year is the "Proprietary" flow at brokers. This is now positive for ten years in a row, and there are particular reasons for this, as discussed below.
Because of the noise around recent articles about the BOJ and foreign activity, I decided to once again dust off the long-term analytics on Japan investor class flows, and present them here. Because flows net off to close to zero (i.e. there are a certain number of shares, and if some investor class is a net seller, other investor classes must be net buyer(s)), deriving a model for behavior is useful.  Long ago, in roles in fixed income and equity derivatives strategy, I built models of net foreign buying, and they uniformly showed that foreign investors chase/push/drive performance. My final model is a multi-input model which provides a simple combination of two factors they chase.
This insight discusses those behavior models, investor class flow dynamics, cycles, and trends and pressures near-term.
The combination of the investor class flows, and the model which drives net foreign activity, is interesting. I think it helps because the top-down aspect matters for understanding allocation flow.
Read on for the nitty gritty (as usual, we start with Conclusions First).

JAPAN FLOW:  Foreign Investor Flows Still Matter (Redux, Reduxed) - Playing Catchup

Japan

cocokara fine Inc. is a holding company established through a merger of SEIJO Corporation and Segami Medics. The Company operates drug chain stores which sell medicines, health food, cosmetics, nursery items and daily necessity goods.

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Cocokara Fine (3098 JP)

Last Week in Event SPACE: China Youzan, Mcdonald's, Beijing Jingneng, Ricoh, Melco Resorts, LG Corp

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

MatsuKiyoCocokara Merger and Implied Forward Forecasts

The MatsuKiyo+Cocokara NEWCO makes for a compelling investment. One model for the breakdown of the components of forward revenue, OP, and NP, and...

Travis Lundy

MatsukiyoCocokara & Co - The Merger

The MatsuKiyo Cocokara merger NEWCO will be named MatsuKiyo Cocokara. That's boring. The details, however, are not. This stock is cheap and...

Travis Lundy

Cocokara/MatsuKiyo Deal Finally Coming?

10 days ago cocokara fine (3098) announced a delay in Q3 earnings because of the coronavirus emergency measures - to the same day as MatsuKiyo...

Travis Lundy

JAPAN FLOW: Foreign Investor Flows Still Matter (Redux, Reduxed) - Playing Catchup

The Japanese market has unusual flow cyclicality. Foreigners take price. They have been net sellers. They buy when USD-denom TOPIX outperforms....

Travis Lundy

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Last Week in Event SPACE: China Youzan, Mcdonald's, Beijing Jingneng, Ricoh, Melco Resorts, LG Corp

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

MatsuKiyoCocokara Merger and Implied Forward Forecasts

The MatsuKiyo+Cocokara NEWCO makes for a compelling investment. One model for the breakdown of the components of forward revenue, OP, and NP, and...

Travis Lundy

MatsukiyoCocokara & Co - The Merger

The MatsuKiyo Cocokara merger NEWCO will be named MatsuKiyo Cocokara. That's boring. The details, however, are not. This stock is cheap and...

Travis Lundy

Cocokara/​MatsuKiyo Deal Finally Coming?

10 days ago cocokara fine (3098) announced a delay in Q3 earnings because of the coronavirus emergency measures - to the same day as MatsuKiyo...

Travis Lundy

JAPAN FLOW: Foreign Investor Flows Still Matter (Redux, Reduxed) - Playing Catchup

The Japanese market has unusual flow cyclicality. Foreigners take price. They have been net sellers. They buy when USD-denom TOPIX outperforms....

Travis Lundy

Cocokara/MatsuKiyo Deal Finally Coming?