Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

When <a href="https://www.smartkarma.com/entities/showa-denko-k-k" target="_blank" data-smartkarma-citation="entities:1496:1" rel="noopener">Showa Denko K.K. (4004 JP)</a> presented their H1 <a href="https://www.sdk.co.jp/assets/files/english/ir/library/pdf_presentation/results2021-2q.pdf" target="_blank" rel="noopener">results</a> on 10 August 2021, and later held their analyst call, it seemed quite bullish. The company was a year ahead of its internal integration efforts after having purchased Hitachi Chemical (renaming it Showa Denko Materials) in a HUGE debt-financed deal in 2020. The company noted that all businesses were operating well and that residual negative numbers coming from restructuring costs and other weaknesses were simply a matter of time to overcome.The company showed an OP forecast which even it admitted was light, and for the year the forecast at ¥85bn remains significantly impacted by the amortisation of goodwill due to the purchase of the Hitachi Chemicals business (¥17.6bn this year). This is to say that OP would be 20% higher if Showa Denko had used US-GAAP or IFRS to account for the purchase of Hitachi Chem.Net Income forecasts out years from now are impacted by this cost to amortise the purchase goodwill. The call was interesting in that it talked about efforts to reduce interest-bearing debt, and also talked about aggressive investment measures. That probably should have been a hint. The shares fell hard from the 17th to the 20th as crude oil did too. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/227/837/original/Screenshot+2021-09-04+at+5.14.22+PM.png?1630746942" class="editor-image img-responsive" data-smartkarma-image-id="227837"></figure></section>And 13 days after the earnings release the company <a href="https://www.sdk.co.jp/assets/files/english/news/2021/20210823_sdknewsrelease_e.pdf" target="_blank" rel="noopener">announced</a> an equity sale where they would sell 35.1mm shares (including greenshoe) to investors. That is a big number, at roughly a quarter of the pre-existing share count. It is even bigger when you consider shareholder structure. Pricing is likely on 6 September. Below the fold we look at shareholder structure, offer structure, and index demand.

When Showa Denko K.K. (4004 JP) presented their H1 results on 10 August 2021, and later held their analyst call, it seemed quite bullish. The company was a year ahead of its internal integration efforts after having purchased Hitachi Chemical (renaming it Showa Denko Materials) in a HUGE debt-financed deal in 2020. The company noted that all businesses were operating well and that residual negative numbers coming from restructuring costs and other weaknesses were simply a matter of time to overcome.The company showed an OP forecast which even it admitted was light, and for the year the forecast at ¥85bn remains significantly impacted by the amortisation of goodwill due to the purchase of the Hitachi Chemicals business (¥17.6bn this year). This is to say that OP would be 20% higher if Showa Denko had used US-GAAP or IFRS to account for the purchase of Hitachi Chem.Net Income forecasts out years from now are impacted by this cost to amortise the purchase goodwill. The call was interesting in that it talked about efforts to reduce interest-bearing debt, and also talked about aggressive investment measures. That probably should have been a hint. The shares fell hard from the 17th to the 20th as crude oil did too. And 13 days after the earnings release the company announced an equity sale where they would sell 35.1mm shares (including greenshoe) to investors. That is a big number, at roughly a quarter of the pre-existing share count. It is even bigger when you consider shareholder structure. Pricing is likely on 6 September. Below the fold we look at shareholder structure, offer structure, and index demand.

Showa Denko (4004 JP) Offering - Supply, Passive Demand, and Opportunity

'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. 

Equity Bottom-Up

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/429/original/2020-02-12_12-29-56.png?1581478227" class="editor-image img-responsive" data-smartkarma-image-id="117429"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<a href="https://www.smartkarma.com/entities/taiyo-nippon-sanso-corp" target="_blank" data-smartkarma-citation="entities:15756:1" rel="noopener">TAIYO NIPPON SANSO (4091 JP)</a> - TNS, itself a three-way merger between Nippon Sanso, Taiyo Sanso and Toyo Sanso, has been one of Japan's more globally acquisitive companies in recent years. The company has bought businesses from Linde (North America), Praxair (Europe) and Air Liquide (USA), Air Products (Thailand) while buying businesses outright or majority stakes in India, Australia, Singapore, Thailand. From  2014, TNS became a consolidated subsidiary of <a href="https://www.smartkarma.com/entities/mitsubishi-chemical-holdings" target="_blank" data-smartkarma-citation="entities:12781:1" rel="noopener">Mitsubishi Chemical (4188 JP),</a> a stake that represents 44% of Mitsubishi Chemical's current market value. 
HIGH-PRESSURE PERFORMER - TNS shares have been one of the best-performing stocks in the Chemicals Sector in Japan since 2012, rising by 554% and reaching a daily closing high of ¥2,665 on 15th November 2019. Although no longer Overbought and having moved in a  narrow range since July 2019, TNS shares are still trading at the elevated levels commensurate with a high-growth company.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/424/original/2020-02-12_12-16-41.png?1581477424" class="editor-image img-responsive" data-smartkarma-image-id="117424"></figure>
<div class="content-caption">Source • Japan Analytics</div>
TRULY GLOBAL - The domestic gas business is now only 42% of revenues and 29% of Operating Income, with the business spread geographically between the US (25%/25%), Europe (20%.28%), and Asia-Pacific (13%/11.9). Gas margins are higher overseas (10%/15%/10%) than in Japan 7.5%, which has been one of the drivers of the expansion abroad. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/430/original/File%202020-02-12%2011%2051%2021.jpeg?1581478650" class="editor-image img-responsive" data-smartkarma-image-id="117430"></figure>
<div class="content-caption">Source • Company</div>
MOSTLY GAS - Although TNS has four main business lines, the non-Industrial Gas businesses are related to the application of gas technologies and products in fields related to electronics, medical care and energy. The exception is the THERMOS stainless steel vacuum flasks and thermal cookers business which commands margins of over 30% but is only 3% of sales.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/431/original/File%202020-02-12%2012%2042%2011.jpeg?1581479106" class="editor-image img-responsive" data-smartkarma-image-id="117431"></figure>
<div class="content-caption">Source • Company</div>
HOLDCO - In October this year, the company will transition to a holding company and change its name to Nippon Sanso Holdings as outlined above. The aim is to devolve more decision-making authority to the regions/business groups.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/458/original/2020-02-12_11-59-45.png?1581481488" class="editor-image img-responsive" data-smartkarma-image-id="117458"></figure>
<div class="content-caption">Source • Japan Analytics</div>
DOWNWARD REVISION - On 5th February, TNS announced a downward revision of Revenue, Operating Income and Net Income of 4%, 7% and 6%, respectively, due to weak performance in the domestic Gas and Thermos divisions and one-off costs relating to Nippon Ekitan. These revisions are the first downward revisions by the company in six years and will likely be followed by a cautious outlook for FY2021 at the full-year results announcement in May.
AVOID/SELL - Although now more diversified, TNS remains primarily exposed to developed manufacturing economies and has yet to prove it can earn a positive residual return on its newly acquired assets. The company has attracted a premium valuation but has, so far, yet to justify investors' confidence. Shielded by the majority ownership of Mitsubishi Chemicals, there is little pressure than can be exerted on management to focus on returns rather than scale for scale's sake. We consider a TTM EV/OP ratio of 21.4 times excessive for a -1.5% return and recommend avoiding or selling TNS ahead of the upcoming cyclical downturn.


Source • Japan Analytics
TAIYO NIPPON SANSO (4091 JP) - TNS, itself a three-way merger between Nippon Sanso, Taiyo Sanso and Toyo Sanso, has been one of Japan's more globally acquisitive companies in recent years. The company has bought businesses from Linde (North America), Praxair (Europe) and Air Liquide (USA), Air Products (Thailand) while buying businesses outright or majority stakes in India, Australia, Singapore, Thailand. From  2014, TNS became a consolidated subsidiary of Mitsubishi Chemical (4188 JP), a stake that represents 44% of Mitsubishi Chemical's current market value. 
HIGH-PRESSURE PERFORMER - TNS shares have been one of the best-performing stocks in the Chemicals Sector in Japan since 2012, rising by 554% and reaching a daily closing high of ¥2,665 on 15th November 2019. Although no longer Overbought and having moved in a  narrow range since July 2019, TNS shares are still trading at the elevated levels commensurate with a high-growth company.

Source • Japan Analytics
TRULY GLOBAL - The domestic gas business is now only 42% of revenues and 29% of Operating Income, with the business spread geographically between the US (25%/25%), Europe (20%.28%), and Asia-Pacific (13%/11.9). Gas margins are higher overseas (10%/15%/10%) than in Japan 7.5%, which has been one of the drivers of the expansion abroad. 

Source • Company
MOSTLY GAS - Although TNS has four main business lines, the non-Industrial Gas businesses are related to the application of gas technologies and products in fields related to electronics, medical care and energy. The exception is the THERMOS stainless steel vacuum flasks and thermal cookers business which commands margins of over 30% but is only 3% of sales.

Source • Company
HOLDCO - In October this year, the company will transition to a holding company and change its name to Nippon Sanso Holdings as outlined above. The aim is to devolve more decision-making authority to the regions/business groups.

Source • Japan Analytics
DOWNWARD REVISION - On 5th February, TNS announced a downward revision of Revenue, Operating Income and Net Income of 4%, 7% and 6%, respectively, due to weak performance in the domestic Gas and Thermos divisions and one-off costs relating to Nippon Ekitan. These revisions are the first downward revisions by the company in six years and will likely be followed by a cautious outlook for FY2021 at the full-year results announcement in May.
AVOID/SELL - Although now more diversified, TNS remains primarily exposed to developed manufacturing economies and has yet to prove it can earn a positive residual return on its newly acquired assets. The company has attracted a premium valuation but has, so far, yet to justify investors' confidence. Shielded by the majority ownership of Mitsubishi Chemicals, there is little pressure than can be exerted on management to focus on returns rather than scale for scale's sake. We consider a TTM EV/OP ratio of 21.4 times excessive for a -1.5% return and recommend avoiding or selling TNS ahead of the upcoming cyclical downturn.

4091🇯🇵 Taiyo Nippon Sanso - High-Pressure • High-Stakes

After the close today, <a href="https://www.smartkarma.com/entities/mitsubishi-chemical-holdings" target="_blank" data-smartkarma-citation="entities:12781:1" rel="noopener">Mitsubishi Chemical (4188 JP)</a> ("MCH") announced a Tender Offer to buy in the minorities of <a href="https://www.smartkarma.com/entities/mitsubishi-tanabe-pharma" target="_blank" data-smartkarma-citation="entities:6311:1" rel="noopener">Mitsubishi Tanabe Pharma (4508 JP)</a> at a 50% premium to last.This is big news. It is a big deal.<ul>
<li>It is coming at a 50% premium and a two-year high.</li>
<li>It is a $4.5bn deal to take out minorities. </li>
</ul>This will make some people happy. It is also probably a pretty easy deal to get done given what the shareholder register looks like. The question will be whether the non-cash cash-like assets are being valued properly, whether the possible Gilenya revenue stream is being valued properly, and whether MCH is simply buying Tanabe's previously high-priced purchases for lower multiples. Given MCH and crossholders own about 61% of shares out, and passive and active foreigners own a fair bit and some will be fine with this deal, it looks pretty easy to complete. That said, it may trade a little wide simply because it is a big deal and arbitrageurs would have to carry over year-end.As always, MUCH more below the fold.<hr>Also as always, I can recommend reading the <a href="https://www.smartkarma.com/insights/quiddity-japan-m-a-guide-2019" target="_blank" rel="noopener">Quiddity Japan M&amp;A Guide</a> for more info and links to relevant documentation.

After the close today, Mitsubishi Chemical (4188 JP) ("MCH") announced a Tender Offer to buy in the minorities of Mitsubishi Tanabe Pharma (4508 JP) at a 50% premium to last.This is big news. It is a big deal.
It is coming at a 50% premium and a two-year high.
It is a $4.5bn deal to take out minorities. 
This will make some people happy. It is also probably a pretty easy deal to get done given what the shareholder register looks like. The question will be whether the non-cash cash-like assets are being valued properly, whether the possible Gilenya revenue stream is being valued properly, and whether MCH is simply buying Tanabe's previously high-priced purchases for lower multiples. Given MCH and crossholders own about 61% of shares out, and passive and active foreigners own a fair bit and some will be fine with this deal, it looks pretty easy to complete. That said, it may trade a little wide simply because it is a big deal and arbitrageurs would have to carry over year-end.As always, MUCH more below the fold.Also as always, I can recommend reading the Quiddity Japan M&amp;A Guide for more info and links to relevant documentation.

MitChem Deal for MitTanabePharma - Opportunistic But Likely Not To Cause Too Much Upset

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

With <a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a> exploring bids for its <a href="https://www.smartkarma.com/entities/hitachi-chemical-co-ltd" target="_blank" data-smartkarma-citation="entities:14457:1" rel="noopener">Hitachi Chemical (4217 JP)</a> unit we examine the subsidiary's array of businesses to try and assess how realistic the reported ¥800bn valuation that has been reported is.

With Hitachi Ltd (6501 JP) exploring bids for its Hitachi Chemical (4217 JP) unit we examine the subsidiary's array of businesses to try and assess how realistic the reported ¥800bn valuation that has been reported is.

Hitachi Chemical: How Can You Justify an ¥800bn Valuation?

CEO, A. Stotz Investment Research

Dr. Andrew Stotz, CFA

Quantamental Investing to beat Benchmarks

A. Stotz Investment Research

We pick stocks. We construct portfolios. All our effort is focused on how to better pick stocks and construct portfolios. We serve fund management companies, family offices, and high net worth individuals.

Petronas Chemicals Group / Equity Bottom-Up

<ul>
<li>Low correlation, good price momentum, and low correlation with western stock markets relative to its sector</li>
<li>Stable demand from major global petrochemical end users is keeping utilization rates high, revenue up by 20% YoY in 2Q18</li>
<li>Longer-term growth should start realizing in 2019 as its RAPID project facilities gradually start commercial operations</li>
<li>Trades above ASEAN Materials at 18CE* 2.5x PB, ROE is in line with the sector, and PCHEM is net cash</li>
<li>Risks: Unexpected softening in crude oil price to depress average selling prices, delays in planned maintenance work, unplanned shutdowns</li>
</ul>* Consensus Estimates


Low correlation, good price momentum, and low correlation with western stock markets relative to its sector
Stable demand from major global petrochemical end users is keeping utilization rates high, revenue up by 20% YoY in 2Q18
Longer-term growth should start realizing in 2019 as its RAPID project facilities gradually start commercial operations
Trades above ASEAN Materials at 18CE* 2.5x PB, ROE is in line with the sector, and PCHEM is net cash
Risks: Unexpected softening in crude oil price to depress average selling prices, delays in planned maintenance work, unplanned shutdowns
* Consensus Estimates

PCHEM (PCHEM MK): RAPID Project to Start Operations in 2019

Japan

Mitsubishi Chemical Holdings Corporation is a holding company established through the merger of Mitsubishi Chemical and Mitsubishi Pharma.  The Company manages operation of its subsidiaries.

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Mitsubishi Chemical (4188 JP)

Showa Denko (4004 JP) Offering - Supply, Passive Demand, and Opportunity

Showa Denko's offering is not ginormous, but it is BIG. And it will engender a fair bit of passive flow. The question is whether investors will buy...

Travis Lundy

4091🇯🇵 Taiyo Nippon Sanso - High-Pressure • High-Stakes

TAIYO NIPPON SANSO (4091 JP) - TNS, itself a three-way merger between Nippon Sanso, Taiyo Sanso and Toyo Sanso, has been one of Japan's more...

Campbell Gunn

MitChem Deal for MitTanabePharma - Opportunistic But Likely Not To Cause Too Much Upset

After the close today, Mitsubishi Chemical (4188 JP) ("MCH") announced a Tender Offer to buy in the minorities of Mitsubishi Tanabe Pharma (4508...

Travis Lundy

Hitachi Chemical: How Can You Justify an ¥800bn Valuation?

With Hitachi Ltd (6501 JP) exploring bids for its Hitachi Chemical (4217 JP) unit we examine the subsidiary's array of businesses to try and assess...

Mio Kato

PCHEM (PCHEM MK): RAPID Project to Start Operations in 2019

Low correlation, good price momentum, and low correlation with western stock markets relative to its sector Stable demand from major global...

A. Stotz Investment Research

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