Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Friday morning, the Nikkei said there was a deal in the offing where Mitsui Fudosan would bid for <a href="https://www.smartkarma.com/entities/tokyo-dome-corp" target="_blank" data-smartkarma-citation="entities:6421:1" rel="noopener">Tokyo Dome Corp (9681 JP)</a>.  As someone concerned with the governance weakness shown too many times in Japanese takeover situations, I am almost automatically disappointed to see such headlines. It leads me to expect that later the same day I will be mumbling words at my monitor that I should not say aloud. </p>
<p>I did Friday.</p>
<p>My constant question is HOW can independent directors of companies with unique and valuable assets deign to sell them at such inexpensive prices? Often those unique and valuable assets are uniquely valuable items such as cash, portfolios of listed securities, and land and property assets with an easily external valuation. </p>
<p>Sometimes cash and securities get tossed into a DCF as being assets which need to be discounted 9-11% a year on their ability to throw off cash, never mind the fact that the equity holdings are purchased at cash flow yields of 2-3% and bonds are bought with yields of 0-1%. Real estate holdings are usually purchased at yields of 4-6%. So automatically, anything of any real value and inherently low cash-flow yield gets marked down for the friendly buyer. Extra cash is almost never dividended out, and there is never (with the one exception of the takeover of <a href="https://www.smartkarma.com/entities/asatsu-dk-inc" target="_blank" data-smartkarma-citation="entities:8715:1" rel="noopener">Asatsu Dk Inc (9747 JP)</a> a few years ago) any tally of what the non-operating assets are worth to create an Adjusted Enterprise Value. </p>
<p>This time is no different. </p>
<p>This is a big fat piece of land in central Tokyo, and a fair number of unique, quite unreplaceable assets and businesses which should command a moat. And earnings have been penalized for years by a total lack of effective maintenance and stewardship by management. </p>
<p>Oasis proposed buying the company at ¥1300/share in January but said the stock was worth well over ¥2000/share in its public <a href="https://static1.squarespace.com/static/5dd62b05f226644911c6d4e1/t/5efabd9b2d98f71482b79156/1593490878125/OASIS+-+A+Better+Tokyo+Dome+Presentation.pdf" target="_blank" rel="noopener">presentation</a> at the same time. Mitsui Fudosan - a professional strategic owner of prime property assets - bid ¥1200/share earlier this month before being <em>asked</em> to bid ¥1350/share. They bid ¥1300/share.</p>
<p>I am not sure the conversation ends there.</p>
<p>My analysis continues below.</p>

Friday morning, the Nikkei said there was a deal in the offing where Mitsui Fudosan would bid for Tokyo Dome Corp (9681 JP).  As someone concerned with the governance weakness shown too many times in Japanese takeover situations, I am almost automatically disappointed to see such headlines. It leads me to expect that later the same day I will be mumbling words at my monitor that I should not say aloud. 
I did Friday.
My constant question is HOW can independent directors of companies with unique and valuable assets deign to sell them at such inexpensive prices? Often those unique and valuable assets are uniquely valuable items such as cash, portfolios of listed securities, and land and property assets with an easily external valuation. 
Sometimes cash and securities get tossed into a DCF as being assets which need to be discounted 9-11% a year on their ability to throw off cash, never mind the fact that the equity holdings are purchased at cash flow yields of 2-3% and bonds are bought with yields of 0-1%. Real estate holdings are usually purchased at yields of 4-6%. So automatically, anything of any real value and inherently low cash-flow yield gets marked down for the friendly buyer. Extra cash is almost never dividended out, and there is never (with the one exception of the takeover of Asatsu Dk Inc (9747 JP) a few years ago) any tally of what the non-operating assets are worth to create an Adjusted Enterprise Value. 
This time is no different. 
This is a big fat piece of land in central Tokyo, and a fair number of unique, quite unreplaceable assets and businesses which should command a moat. And earnings have been penalized for years by a total lack of effective maintenance and stewardship by management. 
Oasis proposed buying the company at ¥1300/share in January but said the stock was worth well over ¥2000/share in its public presentation at the same time. Mitsui Fudosan - a professional strategic owner of prime property assets - bid ¥1200/share earlier this month before being asked to bid ¥1350/share. They bid ¥1300/share.
I am not sure the conversation ends there.
My analysis continues below.

Tokyo Dome Sells Itself For the Wrong Price

<p>Friday after the close, it was announced that SMFL MIRAI Investment Partners, an entity wholly-owned by Sumitomo Mitsui Finance &amp; Leasing Company (as sub of <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a>) had determined to launch a Tender Offer to acquire common stock in <a href="https://www.smartkarma.com/entities/kenedix-inc" target="_blank" data-smartkarma-citation="entities:11321:1" rel="noopener">Kenedix Inc (4321 JP)</a>.</p><p>It would appear that someone knew this before the open as the shares opened strong and continued strong all day, rising nearly 10%. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/079/original/Screenshot%202020-11-22%20at%2010.36.21%20AM.png?1606012603" class="editor-image img-responsive" data-smartkarma-image-id="173079"></figure></section><p></p><p>This has not, as of this writing, been properly explained. We'll see an explanation is forthcoming.</p><div class="content-highlight">
<p>The bid is not terribly impressive.</p>
<p>It is a three-year high, but it matches that high, and does not exceed it.</p>
<p>The Bid Enterprise Value at ¥196bn is not that high a multiple against forward OP historically speaking, and the Bid Price vs Forward Book Value and Bid EV vs AUM are not terribly impressive either. </p>
</div><section class="figure"><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/083/original/Screenshot%202020-11-22%20at%2010.56.32%20AM.png?1606013805" class="editor-image img-responsive" data-smartkarma-image-id="173083"></figure></section><p>Of course, the lead investor ARA Asset Management is not selling. They are joining the bid. </p>
<p><strong>This bid does not look optimal. </strong></p>
<div>
<hr>
<p>I am reminded of the last words (the last line below) of Mr. Partridge ("Old Turkey") in Edwin Lefèvre's <em>Reminiscences of a Stock Operator</em> after he had purchased the stock on the urging of a tipster, and the tipster proposed he sell the shares on a bounce, hoping for a "reaction" on which to buy them... </p>
</div>
<div><blockquote>
<p>"I couldn’t think of selling that stock.” </p>
<p>“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer.</p>
<p>“Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.</p>
<p>“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”</p>
<p>“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”</p>
</blockquote></div>
<p>It may be questionable whether Commercial Real Estate is really in a bull market given the exigencies presented by the corporate and consumer reaction to COVID-19, but investors who purport to be long-term investors interested in fundamentals need to look at Tender Offers and Takeover Bids and think a bit more like Mr. Partridge. </p>
<p>Just because a Tender Offer is presented at a premium does not mean that accepting it is a good idea. Management, owners, and "strategic" corporate buyers often think that they should be allowed to take over a company from its shareholders simply because they want to do so. They think the price THEY choose must therefore be the right one. Interestingly, the funds they manage would choose to put a property on the market at a yield at which other funds have demonstrated buying interest, or they would choose to auction the property. </p>
<p>That did not happen here. </p>
<div><p>As I suggested in <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" data-smartkarma-citation="insights:41191" rel="noopener">Japan Needs More Cowbell</a>...</p></div>
<div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/173/084/original/image?1606014973" class="editor-image img-responsive" data-smartkarma-image-id="173084"></figure></div>
<div><div>
<p>Independent shareholders need to speak up. If you do not, you tacitly approve being abused this time AND next time.</p>
<p>As always, much more below the fold.</p>
</div></div>
<p></p></section><p></p></section>

Friday after the close, it was announced that SMFL MIRAI Investment Partners, an entity wholly-owned by Sumitomo Mitsui Finance &amp; Leasing Company (as sub of Sumitomo Mitsui Financial Group (8316 JP)) had determined to launch a Tender Offer to acquire common stock in Kenedix Inc (4321 JP).It would appear that someone knew this before the open as the shares opened strong and continued strong all day, rising nearly 10%. This has not, as of this writing, been properly explained. We'll see an explanation is forthcoming.
The bid is not terribly impressive.
It is a three-year high, but it matches that high, and does not exceed it.
The Bid Enterprise Value at ¥196bn is not that high a multiple against forward OP historically speaking, and the Bid Price vs Forward Book Value and Bid EV vs AUM are not terribly impressive either. 
Of course, the lead investor ARA Asset Management is not selling. They are joining the bid. 
This bid does not look optimal. 


I am reminded of the last words (the last line below) of Mr. Partridge ("Old Turkey") in Edwin Lefèvre's Reminiscences of a Stock Operator after he had purchased the stock on the urging of a tipster, and the tipster proposed he sell the shares on a bounce, hoping for a "reaction" on which to buy them... 


"I couldn’t think of selling that stock.” 
“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer.
“Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.
“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”

It may be questionable whether Commercial Real Estate is really in a bull market given the exigencies presented by the corporate and consumer reaction to COVID-19, but investors who purport to be long-term investors interested in fundamentals need to look at Tender Offers and Takeover Bids and think a bit more like Mr. Partridge. 
Just because a Tender Offer is presented at a premium does not mean that accepting it is a good idea. Management, owners, and "strategic" corporate buyers often think that they should be allowed to take over a company from its shareholders simply because they want to do so. They think the price THEY choose must therefore be the right one. Interestingly, the funds they manage would choose to put a property on the market at a yield at which other funds have demonstrated buying interest, or they would choose to auction the property. 
That did not happen here. 
As I suggested in Japan Needs More Cowbell...


Independent shareholders need to speak up. If you do not, you tacitly approve being abused this time AND next time.
As always, much more below the fold.



A Curiously Unsatisfying Takeover Bid For Kenedix

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/111/668/original/image_43774002421577073129098.png?1577073126" class="editor-image img-responsive" data-smartkarma-image-id="111668"></figure>
<div class="content-caption">Source; Capital IQ</div>
<p>In the past, the share price is almost always following analyst recommendation but the most troubling thing about TKP is its high valuation. TKP is not exactly without a competitor in Japan, albeit TKP has the biggest market share. TKP business model is a flexible conference room rental provider in which the management source idle assets in Japan and resell them through the internet started with entrepreneurs and of late to listed corporates as well.</p>
<p>The company's profitability is short of that mind-blowing numbers and it has a massive debt in its balance sheet as well. <strong>Does paying 3x more than its peers justify for a conference room rental business with low profitability? </strong></p>
<p>While investors are happy to pay a premium for its dominant market share in Japan, they should be cautioned if they were to pay the same valuation level for TKP's overseas venture. The flexible working space outside of Japan has been filled with innovative competitors. With a limited success potential for its overseas venture, investors should start to sell/short-sell <a href="https://www.smartkarma.com/entities/tkp-corporation" target="_blank" data-smartkarma-citation="entities:28305:1" rel="noopener"> TKP Corporation (3479 JP)</a> .</p>


Source; Capital IQ
In the past, the share price is almost always following analyst recommendation but the most troubling thing about TKP is its high valuation. TKP is not exactly without a competitor in Japan, albeit TKP has the biggest market share. TKP business model is a flexible conference room rental provider in which the management source idle assets in Japan and resell them through the internet started with entrepreneurs and of late to listed corporates as well.
The company's profitability is short of that mind-blowing numbers and it has a massive debt in its balance sheet as well. Does paying 3x more than its peers justify for a conference room rental business with low profitability? 
While investors are happy to pay a premium for its dominant market share in Japan, they should be cautioned if they were to pay the same valuation level for TKP's overseas venture. The flexible working space outside of Japan has been filled with innovative competitors. With a limited success potential for its overseas venture, investors should start to sell/short-sell  TKP Corporation (3479 JP) .

<p>After the close today, The Nikkei Inc <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20190904E_1.pdf" target="_blank" rel="noopener">announced</a> that <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 Inc (2413 JP)</a> would join the Nikkei 225 and would replace <a href="https://www.smartkarma.com/entities/tokyo-dome-corp" target="_blank" data-smartkarma-citation="entities:6421:1" rel="noopener">Tokyo Dome Corp (9681 JP)</a>. </p><hr><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/097/937/original/Screenshot%202019-09-04%20at%203.43.33%20PM.png?1567583098" class="editor-image img-responsive" data-smartkarma-image-id="97937"></figure><hr><p>This appears to be <em>a little bit</em> of a surprise given the lack of buildup in excess volumes, even though M3 was on the short list of the Consumer sector for most event analysts (the other names commonly thrown around were <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a> and <a href="https://www.smartkarma.com/entities/kenedix-inc" target="_blank" data-smartkarma-citation="entities:11321:1" rel="noopener">Kenedix Inc (4321 JP)</a>, and Tokyo Dome has been on the cusp of being deleted for years. All in all, these should not be too surprising, but either way, it is a lot of volume - more than 30 days of ADV on each side. </p><p>If you are involved in M3, Tokyo Dome, or their competitors, I would have a look at the flows. </p>

After the close today, The Nikkei Inc announced that M3 Inc (2413 JP) would join the Nikkei 225 and would replace Tokyo Dome Corp (9681 JP). This appears to be a little bit of a surprise given the lack of buildup in excess volumes, even though M3 was on the short list of the Consumer sector for most event analysts (the other names commonly thrown around were ZOZO Inc (3092 JP) and Kenedix Inc (4321 JP), and Tokyo Dome has been on the cusp of being deleted for years. All in all, these should not be too surprising, but either way, it is a lot of volume - more than 30 days of ADV on each side. If you are involved in M3, Tokyo Dome, or their competitors, I would have a look at the flows. 

<p>Today after the close the Nikkei Inc announced the results of the Annual Review for the <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20180905E_1.pdf" target="_blank">Nikkei 225</a> and the <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20180905E_2.pdf" target="_blank">Nikkei 300</a>.</p><ul>
<li>
<strong>In the Nikkei 225, <a href="https://www.smartkarma.com/entities/8197" target="_blank" data-smartkarma-citation="entities:8197:1">Cyberagent Inc (4751 JP)</a> </strong>will replace <strong><a href="https://www.smartkarma.com/entities/19521" target="_blank" data-smartkarma-citation="entities:19521:1">Furukawa Co Ltd (5715 JP)</a></strong>. Cyberagent has been assigned a <em>presumed par value</em> of 250 yen. The Nikkei 225 Rebalance is likely to be worth roughly $300-400mm a side. </li>
<li>
<strong>In the Nikkei 300, </strong><a href="https://www.smartkarma.com/entities/3077" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence Corp (6861 JP)</a> will replace <a href="https://www.smartkarma.com/entities/1175" target="_blank" data-smartkarma-citation="entities:1175:1">Nippon Sharyo (7102 JP)</a>. The Nikkei 300 rebalance has almost no significance in flow terms as far as I can tell.</li>
</ul><p>The changes on both are effective on October 1st, meaning the changes will be executed at the close of the last trading day of September. </p><p><em>Outside of these names, there is an interesting angle which is looking at all the names which were deemed "possible" but did not make the cut.</em></p>

Today after the close the Nikkei Inc announced the results of the Annual Review for the Nikkei 225 and the Nikkei 300.

In the Nikkei 225, Cyberagent Inc (4751 JP) will replace Furukawa Co Ltd (5715 JP). Cyberagent has been assigned a presumed par value of 250 yen. The Nikkei 225 Rebalance is likely to be worth roughly $300-400mm a side. 

In the Nikkei 300, Keyence Corp (6861 JP) will replace Nippon Sharyo (7102 JP). The Nikkei 300 rebalance has almost no significance in flow terms as far as I can tell.
The changes on both are effective on October 1st, meaning the changes will be executed at the close of the last trading day of September. Outside of these names, there is an interesting angle which is looking at all the names which were deemed "possible" but did not make the cut.

2018 Annual Nikkei 225 Rebalance - Small Potatoes As Expected

Japan

Kenedix, Inc. provides real estate investment services such as real estate investment advisory, assets management, and loan (asset backed mortgages) investment.

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Kenedix Inc (4321 JP)

Tokyo Dome Sells Itself For the Wrong Price

Tokyo Dome is the subject of an activist effort to improve shareholder value for everyone with a stated target from improvements of 140+%. So Tokyo...

Travis Lundy

A Curiously Unsatisfying Takeover Bid For Kenedix

Sumitomo Mitsui Finance & Lease and lead shareholder ARA Asset Mgmt are launching a bid to take over property manager Kenedix ahead of a large jump...

Travis Lundy

TKP (3479) - A Working Wework?

In the past, the share price is almost always following analyst recommendation but the most troubling thing about TKP is its high valuation. TKP...

Henry Soediarko

Nikkei 225 Rebal - M3 IN, Tokyo Dome OUT

After the close today, The Nikkei Inc announced that M3 Inc (2413 JP) would join the Nikkei 225 and would replace Tokyo Dome Corp (9681 JP). This...

Travis Lundy

2018 Annual Nikkei 225 Rebalance - Small Potatoes As Expected

Today after the close the Nikkei Inc announced the results of the Annual Review for the Nikkei 225 and the Nikkei 300. In the Nikkei 225,...

Travis Lundy

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