Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

When <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 in Q2 2019, the share price went up compared to the share prices of the suitors. When cocokara Fine chose <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> in early Q3, it was a good time to sell cocokara Fine which had somewhat over-run its near-term potential. The price/book ratio was lower, but the earnings ratio was such that when the two companies looked like they were going to choose a ratio, there was not a lot of upside to cocokara vs MatsuKiyo unless MatsuKiyo paid extra for the synergies. The reason for that, as explained in a couple of my insights was that Matsumoto Kiyoshi ran a tight ship and profit machine and aimed for high gross margins and high turnover per store while cocokara had a different service and growth profile, expanding breadth before expanding profitability. Synergies which added 1% to OPMs at both cocokara and MatsuKiyo would have a much greater impact on relative increase in profitability at cocokara.For whatever reason (I believe it to have been one about price ratio due lack of agreement on cocokara's future prospects when synergies were included) the decision on a ratio was put off early in 2020 and the two companies agreed to a delayed-vs-expectations integration process. 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.<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;">Date</td>
<td style="width: 330px;">Detail</td>
<td style="width: 224px;">Comment</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;">What you just got</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;">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.</td>
</tr>
<tr>
<td style="width: 128px;">Feb 2021</td>
<td style="width: 330px;">Execution of definitive agreement related to the Business Integration</td>
<td style="width: 224px;">The Merger Ratio Announcement</td>
</tr>
<tr>
<td style="width: 128px;">June 2021</td>
<td style="width: 330px;">Ordinary general meetings of shareholders of both companies (resolution regarding approval of the Business Integration)</td>
<td style="width: 224px;">The Approvals</td>
</tr>
<tr>
<td style="width: 128px;">1 Oct 2021</td>
<td style="width: 330px;">Effective Date of the Business Integration</td>
<td style="width: 224px;">The Merger</td>
</tr>
</tbody></table>I thought the look was going to "disappoint" markets, particularly cocokara, but that it was worth buying the dip on cocokara because confidence that synergies would appear would be good for the combined firm, and synergies that would "prove" the worth of cocokara would show up in the ratio.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.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/160/928/original/Screenshot%202020-09-23%20at%208.26.10%20PM.png?1600863982" class="editor-image img-responsive" data-smartkarma-image-id="160928"></figure>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 is now.  Where to now?More below the fold.

When Cocokara Fine (3098 JP) was being courted by multiple suitors in Q2 2019, the share price went up compared to the share prices of the suitors. When cocokara Fine chose Matsumotokiyoshi Holdings Co (3088 JP) rather than Sugi Holdings (7649 JP) in early Q3, it was a good time to sell cocokara Fine which had somewhat over-run its near-term potential. The price/book ratio was lower, but the earnings ratio was such that when the two companies looked like they were going to choose a ratio, there was not a lot of upside to cocokara vs MatsuKiyo unless MatsuKiyo paid extra for the synergies. The reason for that, as explained in a couple of my insights was that Matsumoto Kiyoshi ran a tight ship and profit machine and aimed for high gross margins and high turnover per store while cocokara had a different service and growth profile, expanding breadth before expanding profitability. Synergies which added 1% to OPMs at both cocokara and MatsuKiyo would have a much greater impact on relative increase in profitability at cocokara.For whatever reason (I believe it to have been one about price ratio due lack of agreement on cocokara's future prospects when synergies were included) the decision on a ratio was put off early in 2020 and the two companies agreed to a delayed-vs-expectations integration process. 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.
The Schedule of the Integration

Date
Detail
Comment


31 Jan 2020
Business Integration &amp; Capital Alliance Announcement
What you just got


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

I thought the look was going to "disappoint" markets, particularly cocokara, but that it was worth buying the dip on cocokara because confidence that synergies would appear would be good for the combined firm, and synergies that would "prove" the worth of cocokara would show up in the ratio.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 is now.  Where to now?More below the fold.

Cocokara/MatsuKiyo - Big Gains Since Delay, Stay Long Both

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Equity Bottom-Up

Genky DrugStores Co Ltd / Equity Bottom-Up

Although counted as a drugstore, <a href="https://www.smartkarma.com/entities/genky-drugstores-co-ltd" target="_blank" data-smartkarma-citation="entities:29203:1" rel="noopener">Genky DrugStores Co Ltd (9267 JP)</a> is one of Japan’s most food-focused discount retailers. The chain has grown rapidly in recent years, with sales up 19% in FY2019 to June alone. It now plans to double that volume over the next three years.Of these new stores, some will be pure supermarkets (of a discount variety) as the company moves beyond drugstores. Last month, Genky opened its first supermarket or "delicious drugstore" as it calls it.As indicated in other insights here, the Japanese discount sector is on a roll and likely to continue to do so for the next decade thanks to vast unsatisfied demand from consumer households under pressure.Genky looks like being one of the beneficiaries.

Although counted as a drugstore, Genky DrugStores Co Ltd (9267 JP) is one of Japan’s most food-focused discount retailers. The chain has grown rapidly in recent years, with sales up 19% in FY2019 to June alone. It now plans to double that volume over the next three years.Of these new stores, some will be pure supermarkets (of a discount variety) as the company moves beyond drugstores. Last month, Genky opened its first supermarket or "delicious drugstore" as it calls it.As indicated in other insights here, the Japanese discount sector is on a roll and likely to continue to do so for the next decade thanks to vast unsatisfied demand from consumer households under pressure.Genky looks like being one of the beneficiaries.

<a href="https://www.smartkarma.com/entities/aeon-co-ltd" target="_blank" data-smartkarma-citation="entities:3:1" rel="noopener">Aeon Co Ltd (8267 JP)</a> is Japan’s largest retail conglomerate by revenues but it struggles to make respectable profits.Now, as with Seven-Eleven at <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a>, Aeon may have found the high margin star subsidiary it has been looking for: Welcia Holdings.Welcia is the country’s leading drugstore chain and is growing strongly, exceeding ¥1 trillion in sales for the first time and forecasting an increase to ¥1.8 trillion through 2023.Last year, it made almost as much profit as the whole of Aeon combined but there are plenty of opportunities to extract more profit from this sector.Like most Japanese drugstore stocks, Welcia is currently trading at historically high levels thanks to a surge in sales from March onwards (see below for details)  but with more consolidation coming in the sector led by the leaders, Welcia is a solid buy when dips in the market provide an opportunity.

Aeon Co Ltd (8267 JP) is Japan’s largest retail conglomerate by revenues but it struggles to make respectable profits.Now, as with Seven-Eleven at Seven &amp; I Holdings (3382 JP), Aeon may have found the high margin star subsidiary it has been looking for: Welcia Holdings.Welcia is the country’s leading drugstore chain and is growing strongly, exceeding ¥1 trillion in sales for the first time and forecasting an increase to ¥1.8 trillion through 2023.Last year, it made almost as much profit as the whole of Aeon combined but there are plenty of opportunities to extract more profit from this sector.Like most Japanese drugstore stocks, Welcia is currently trading at historically high levels thanks to a surge in sales from March onwards (see below for details)  but with more consolidation coming in the sector led by the leaders, Welcia is a solid buy when dips in the market provide an opportunity.

<a href="https://www.smartkarma.com/entities/kirindo-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:20564:1" rel="noopener">Kirindo Holdings (3194 JP)</a> is now the dominant drugstore chain in Kansai and this position gives it a base to build further.Over the next three years, the company plans to expand its range of own brands, particularly in cosmetics and health foods, and to increase the proportion of its nearly 400 stores that offer prescription drug services.This, Kirindo hopes, will grow sales by 12% through FY2022, but it is targeting profits up by 70% in the same period.Given its strong share in the Kansai market, Kirindo could also become a takeover target in the longer-term war for national dominance. For more on the expected increase in M&amp;A activity in the drugstore market, please see our indepth review of the sector: <a href="https://www.smartkarma.com/insights/japanese-drugstores-with-maturity-comes-marriage" target="_blank" rel="noopener">Japanese drugstores: with maturity comes marriage.</a>

Kirindo Holdings (3194 JP) is now the dominant drugstore chain in Kansai and this position gives it a base to build further.Over the next three years, the company plans to expand its range of own brands, particularly in cosmetics and health foods, and to increase the proportion of its nearly 400 stores that offer prescription drug services.This, Kirindo hopes, will grow sales by 12% through FY2022, but it is targeting profits up by 70% in the same period.Given its strong share in the Kansai market, Kirindo could also become a takeover target in the longer-term war for national dominance. For more on the expected increase in M&amp;A activity in the drugstore market, please see our indepth review of the sector: Japanese drugstores: with maturity comes marriage.

Kirindo Establishing Drugstore Dominance in Kansai

Hitachi Construction Machinery / Event-Driven

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 
The filtering is conducted across two basic measures which seek to answer two basic questions:
<ol>
<li>What might supply look like?</li>
<li>What might demand look like?</li>
</ol>
The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 
On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.
In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 
Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 
In short, screening can only go so far. But we try.
At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 
We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 
The filtering is conducted across two basic measures which seek to answer two basic questions:

What might supply look like?
What might demand look like?

The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 
On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.
In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 
Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 
In short, screening can only go so far. But we try.
At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 
We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

Japan

MatsukiyoCocokara & Co. operates drug store chains. The Company retails medicines, cosmetics, health foods, beauty care products, and other products. MatsukiyoCocokara & also operates supermarkets and home centers.

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MatsukiyoCocokara (3088 JP)

Cocokara/MatsuKiyo - Big Gains Since Delay, Stay Long Both

When Cocokara Fine (3098 JP) was bee

Travis Lundy

Genky: Another Japanese Discount Winner

Although counted as a drugstore, Genky is one of Japan’s most food-focused, discount retailers. The chain ihas grown rapidly in recent years, with...

Michael Causton

Welcia: Aeon’s Profit Machine

Aeon Co Ltd (8267 JP) is Japan’s largest retail conglomerate by revenues but it struggles to make respectable profits.Now, as with Seven-Eleven at...

Michael Causton

Kirindo Establishing Drugstore Dominance in Kansai

Kirindo Holdings (3194 JP) is now the dominant drugstore chain in Kansai and this position gives it a base to build further.Over the next three...

Michael Causton

A Potential Asian LBO Screening System

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the...

Travis Lundy

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