Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Thematic (Sector/Industry)

After the close on Tuesday April 28, 2015, Toyota <a href="http://www.toyota-global.com/investors/stock_information_ratings/share_2015/pdf/commonstock_20150428_01.pdf" target="_blank">announced</a>&nbsp;the board had resolved to submit to shareholders a resolution to partially amend&nbsp;the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they have called "Model AA Shares". The announcement noted a first tranche of 500 billion yen, and future tranches.&nbsp;The securities will be unlisted, non-transferable, require buying an embedded put from the company itself, and result in a mini&nbsp;"death spiral" impact on the common shares.&nbsp;My first reaction was "Huh?"After reading all the materials a second, third, and fourth time - in both Japanese and English - given my 15+yrs of looking at the microstructure of Japanese markets, special situations, and unusual security issuances, my reaction has evolved to a more considered, and evolved&nbsp;"Huh?"CONCLUSIONS<ul><li>The explanations do not make a great deal of sense.&nbsp;</li><li>The economics do not make a great deal of sense, nor do they match what should be the desired 'long-term investor' commitment.&nbsp;</li><li>If one looks at the best and highest purpose of such a structure, one must conclude it might be meant for a different purpose than Toyota discloses.</li><li>And if one takes a more skeptical view of Japanese issuance practices, this has to be seen as a slightly bearish development.</li><li>If Toyota is issuing this now as a way to gain acceptance of issuing it to a different group of shareholders than it says, that is bad.</li><li>If Toyota is wasting its time and energy for minimal benefit, that is bad.&nbsp;Toyota does not need to save 34bn yen in dividend payments over 5yrs when they start with 6 trillion yen in cash, and will generate another 10 trillion yen plus in cash over the next 5 years.&nbsp;</li></ul>

After the close on Tuesday April 28, 2015, Toyota announced&nbsp;the board had resolved to submit to shareholders a resolution to partially amend&nbsp;the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they have called "Model AA Shares". The announcement noted a first tranche of 500 billion yen, and future tranches.&nbsp;The securities will be unlisted, non-transferable, require buying an embedded put from the company itself, and result in a mini&nbsp;"death spiral" impact on the common shares.&nbsp;My first reaction was "Huh?"After reading all the materials a second, third, and fourth time - in both Japanese and English - given my 15+yrs of looking at the microstructure of Japanese markets, special situations, and unusual security issuances, my reaction has evolved to a more considered, and evolved&nbsp;"Huh?"CONCLUSIONSThe explanations do not make a great deal of sense.&nbsp;The economics do not make a great deal of sense, nor do they match what should be the desired 'long-term investor' commitment.&nbsp;If one looks at the best and highest purpose of such a structure, one must conclude it might be meant for a different purpose than Toyota discloses.And if one takes a more skeptical view of Japanese issuance practices, this has to be seen as a slightly bearish development.If Toyota is issuing this now as a way to gain acceptance of issuing it to a different group of shareholders than it says, that is bad.If Toyota is wasting its time and energy for minimal benefit, that is bad.&nbsp;Toyota does not need to save 34bn yen in dividend payments over 5yrs when they start with 6 trillion yen in cash, and will generate another 10 trillion yen plus in cash over the next 5 years.&nbsp;

'Model AA' Shares - Good Governance Gone Bad?

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

Equity Capital Markets

Laox plans to raise ~US$250m via a domestic offering, in order to further fund its turnaround plan.The deal scores well on our framework, although the entire score is driven by its strong rally over the past six months (up more than 6x), since data for scoring other factors isn't available (no record of long term returns since the company was making a loss and no analyst coverage either). Due to the aforementioned reasons, our framework arguably doesn't do justice to the deal.&nbsp;On a more subjective basis, the company has a short profitability track record despite the long listing history and thus, will probably not meet the standard investment mandate for most long only fund managers.However, for those who can invest we would take the deal on the back of the encouraging turnaround in operations, management's aggressive mid-term plans to increase profitability, and given that the stock has had time to adjust to the deal announcement, hence, the discount looks adequate. &nbsp;

Laox plans to raise ~US$250m via a domestic offering, in order to further fund its turnaround plan.The deal scores well on our framework, although the entire score is driven by its strong rally over the past six months (up more than 6x), since data for scoring other factors isn't available (no record of long term returns since the company was making a loss and no analyst coverage either). Due to the aforementioned reasons, our framework arguably doesn't do justice to the deal.&nbsp;On a more subjective basis, the company has a short profitability track record despite the long listing history and thus, will probably not meet the standard investment mandate for most long only fund managers.However, for those who can invest we would take the deal on the back of the encouraging turnaround in operations, management's aggressive mid-term plans to increase profitability, and given that the stock has had time to adjust to the deal announcement, hence, the discount looks adequate. &nbsp;

Laox (8202 JP) - A turnaround driven by Chinese tourists - But its not for the faint hearterd

Japan

Laox CO., LTD. operates a chain store known as Laox specialized in household appliances and computers based in Kanto region.  The Company also sells import goods, watch, and musical instruments.

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Laox Co Ltd (8202 JP)

'Model AA' Shares - Good Governance Gone Bad?

After the close on Tuesday April 28, 2015, Toyota announced the board had resolved to submit to shareholders a resolution to partially amend the...

Travis Lundy

Laox (8202 JP) - A turnaround driven by Chinese tourists - But its not for the faint hearterd

Laox plans to raise ~US$250m via a domestic offering, in order to further fund its turnaround plan.The deal scores well on our framework, although...

Sumeet Singh

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