Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

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.

Equity Bottom-Up

<ul>
<li>The acquisition of Swiss financial software company Avaloq should make a meaningful contribution to NEC's Public Solutions division as it expands its digital government services business in Europe, Asia-Pacific and elsewhere. </li>
<li>It follows the acquisition of KMD, a Danish software and IT company specializing in digital government, in 2019, and Northgate Public Services of the UK, which provides software and services to the public sector, in 2018.</li>
<li>The deal is valued at CHF2.05 billion (¥236 billion), or 3.4x Aviloq's 2019 sales and 21x EBITDA. Avaloq's EBITDA/Sales ratio was 16% in 2019, compared with 9.5% for NEC in FY Mar-20.</li>
<li>Aviloq's own growth potential and synergies with NEC's overall business justify the price, in our view. Last December, Aviloq renewed and expanded its 10-year relationship with DBS Bank.</li>
<li>We remain bullish on NEC, targeting more than 30% potential upside to ¥8,000 on the basis of historical valuation ranges.</li>
</ul>


The acquisition of Swiss financial software company Avaloq should make a meaningful contribution to NEC's Public Solutions division as it expands its digital government services business in Europe, Asia-Pacific and elsewhere. 
It follows the acquisition of KMD, a Danish software and IT company specializing in digital government, in 2019, and Northgate Public Services of the UK, which provides software and services to the public sector, in 2018.
The deal is valued at CHF2.05 billion (¥236 billion), or 3.4x Aviloq's 2019 sales and 21x EBITDA. Avaloq's EBITDA/Sales ratio was 16% in 2019, compared with 9.5% for NEC in FY Mar-20.
Aviloq's own growth potential and synergies with NEC's overall business justify the price, in our view. Last December, Aviloq renewed and expanded its 10-year relationship with DBS Bank.
We remain bullish on NEC, targeting more than 30% potential upside to ¥8,000 on the basis of historical valuation ranges.


NEC (6701 JP): Avaloq Acquisition Positive for Earnings and Long-Term Growth

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/994/original/Tokyo_Stock_Exchange_logo.png?1601590198" class="editor-image img-responsive" data-smartkarma-image-id="162994"></figure><p></p><p><strong>FAILOVER FAILURE</strong> - Thursday's unprecedented failure of the Tokyo Stock Exchange's arrowhead trading system developed in co-ordination with <a href="https://www.smartkarma.com/entities/fujitsu-ltd" target="_blank" data-smartkarma-citation="entities:16968:1" rel="noopener">Fujitsu (6702 JP)</a> is highly embarrassing for the newly-minted administration of Prime Minster Suga who has placed particular emphasis on improving Japan's digital capabilities. Trading will resume this morning as normal at 9 am Japan Time.</p><p><strong>PASSING THE BUCK</strong> - In the<strong> DETAIL</strong> section below, we shall provide a summary of the explanations that were offered by the senior management of <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" data-smartkarma-citation="entities:11266:1" rel="noopener">Japan Exchange Group (8697 JP)</a> (JPX) at a 98 minute-long press conference that was held last night. JPX places the 'blame' for this incident squarely on Fujitsu. However, as JPX admitted, Fujitsu is 'just a vendor' and responsibility for the smooth function of the exchange's systems is the responsibility of JPX. We would also note that this is not the first time that the exchange's protocols have failed to failover and that the arrowhead system was upgraded as recently as November 5 2019. At that time the JPX press release stated:-</p><blockquote><p><span>The new version of “arrowhead” uses the existing system as a base for an upgraded technology that offers users the familiar, high speed, high-reliability experience, while delivering even greater convenience. The trading system and transaction services have been improved in order to respond to changes in the business environment and better meet the needs of users, providing stronger overall market functionality.</span></p></blockquote><p></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/995/original/File%202020-10-01%2016%2020%2047.jpeg?1601591437" class="editor-image img-responsive" data-smartkarma-image-id="162995"></figure><div class="content-caption">Source: Nikkei</div>

FAILOVER FAILURE - Thursday's unprecedented failure of the Tokyo Stock Exchange's arrowhead trading system developed in co-ordination with Fujitsu (6702 JP) is highly embarrassing for the newly-minted administration of Prime Minster Suga who has placed particular emphasis on improving Japan's digital capabilities. Trading will resume this morning as normal at 9 am Japan Time.PASSING THE BUCK - In the DETAIL section below, we shall provide a summary of the explanations that were offered by the senior management of Japan Exchange Group (8697 JP) (JPX) at a 98 minute-long press conference that was held last night. JPX places the 'blame' for this incident squarely on Fujitsu. However, as JPX admitted, Fujitsu is 'just a vendor' and responsibility for the smooth function of the exchange's systems is the responsibility of JPX. We would also note that this is not the first time that the exchange's protocols have failed to failover and that the arrowhead system was upgraded as recently as November 5 2019. At that time the JPX press release stated:-The new version of “arrowhead” uses the existing system as a base for an upgraded technology that offers users the familiar, high speed, high-reliability experience, while delivering even greater convenience. The trading system and transaction services have been improved in order to respond to changes in the business environment and better meet the needs of users, providing stronger overall market functionality.Source: Nikkei

🇯🇵 JAPAN • Fujitsu Fails to Failover > JPX Tries to Pass the Buck

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Event-Driven

NTT (Nippon Telegraph & Telephone) / Event-Driven

<p>The explanation supporting NTT’s buyout of Docomo (in Japanese but translated below) is interesting and we believe it supports our initial thoughts on this development. What we didn’t expect was a ¥3,900 tender price.</p>

The explanation supporting NTT’s buyout of Docomo (in Japanese but translated below) is interesting and we believe it supports our initial thoughts on this development. What we didn’t expect was a ¥3,900 tender price.

NTT – NTT Is Going Big and Our Suspicions Are Aroused Further

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/891/original/2020-07-20_11-11-13.png?1595211104" class="editor-image img-responsive" data-smartkarma-image-id="146891"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>THE 'HUNDRED DAYS WAR'</strong> - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing low of 1,236.34 on 16th March, the index has recovered by 27%. However, it has only been in the last ten trading days that the number of new two-year share price highs and lows has consistently been in double-digits.  This month has seen 136 new two-year lows and 214 new two-year highs. Whatever the impact of COVID-19 on earnings, the market is very clearly signalling its preferences for COVID 'Heroes &amp; Villains'. In the <strong>DETAIL</strong> section below, we shall look at the leading large caps in both categories and suggest opportunities in each.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/894/original/2020-07-20_11-42-42.png?1595213322" class="editor-image img-responsive" data-smartkarma-image-id="146894"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>RELATIVE PRICE</strong> - We shall also conduct the same analysis using our Relative Price Score methodology. The July numbers are 469 Relative Price Score new lows and 229 new highs suggesting a high degree of market polarity as confirmed by the percentages of market value in Overbought and Oversold Stocks - which are both at twenty-year highs.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/895/original/2020-07-20_11-58-18.png?1595214235" class="editor-image img-responsive" data-smartkarma-image-id="146895"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>RESULTS DRIVER</strong> - We expect the number of absolute 'heroes and villains' to increase in the next two months as the COVID fallout on earnings is revealed, and will provide further updates as we progress. </p>

Source • Japan AnalyticsTHE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing low of 1,236.34 on 16th March, the index has recovered by 27%. However, it has only been in the last ten trading days that the number of new two-year share price highs and lows has consistently been in double-digits.  This month has seen 136 new two-year lows and 214 new two-year highs. Whatever the impact of COVID-19 on earnings, the market is very clearly signalling its preferences for COVID 'Heroes &amp; Villains'. In the DETAIL section below, we shall look at the leading large caps in both categories and suggest opportunities in each.Source • Japan AnalyticsRELATIVE PRICE - We shall also conduct the same analysis using our Relative Price Score methodology. The July numbers are 469 Relative Price Score new lows and 229 new highs suggesting a high degree of market polarity as confirmed by the percentages of market value in Overbought and Oversold Stocks - which are both at twenty-year highs.Source • Japan AnalyticsRESULTS DRIVER - We expect the number of absolute 'heroes and villains' to increase in the next two months as the COVID fallout on earnings is revealed, and will provide further updates as we progress. 

🇯🇵 JAPAN • The Hundred Days War - COVID Heroes & Villains

<ul>
<li>On June 25, NEC (Japan's leading producer of telecom equipment) and NTT (9432 JP) (Japan's largest telecom network operator) announced plans for joint R&amp;D and global marketing of 5G and other products incorporating leading edge optical and wireless technologies.</li>
<li>To cement the alliance and support the R&amp;D and marketing, NTT has agreed to invest ¥64.5 billion to acquire a 4.8% stake in NEC. </li>
<li>Japan's Ministry of Economy, Trade and Industry (METI) plans to provide ¥70 billion to NEC, Fujitsu and other Japanese companies to develop 5G equipment and networks.</li>
<li>Also, faced with growing Conservative Party opposition to Huawei, Prime Minister Boris Johnson’s UK government is reportedly talking with NEC and considering Samsung Electronics (005930 KS) as alternative suppliers of 5G telecom equipment. NEC and Samsung announced a partnership to develop 5G and IT solutions in October 2018.</li>
<li>Coming on top of extensive restructuring, these developments support our forecast of continued growth in NEC's operating profit through FY Mar-23 and improve the company's longer term prospects.</li>
</ul>


On June 25, NEC (Japan's leading producer of telecom equipment) and NTT (9432 JP) (Japan's largest telecom network operator) announced plans for joint R&amp;D and global marketing of 5G and other products incorporating leading edge optical and wireless technologies.
To cement the alliance and support the R&amp;D and marketing, NTT has agreed to invest ¥64.5 billion to acquire a 4.8% stake in NEC. 
Japan's Ministry of Economy, Trade and Industry (METI) plans to provide ¥70 billion to NEC, Fujitsu and other Japanese companies to develop 5G equipment and networks.
Also, faced with growing Conservative Party opposition to Huawei, Prime Minister Boris Johnson’s UK government is reportedly talking with NEC and considering Samsung Electronics (005930 KS) as alternative suppliers of 5G telecom equipment. NEC and Samsung announced a partnership to develop 5G and IT solutions in October 2018.
Coming on top of extensive restructuring, these developments support our forecast of continued growth in NEC's operating profit through FY Mar-23 and improve the company's longer term prospects.


NEC (6701 JP): Tie-Up with NTT Raises 5G Profile

Japan

NEC Corporation manufactures and markets computers, telecommunication equipment, electronic devices, semiconductors, and software.  The Company's products include printers, modems, cellular phones, plasma display panels (PDP), network systems, memory, integrated circuits (IC), thin film transistor-liquid crystal display (TFT-LCD), and printed circuit boards (PCB). NEC operates worldwide.

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NEC Corp (6701 JP)

NEC (6701 JP): Avaloq Acquisition Positive for Earnings and Long-Term Growth

xxx Avaloq Group AG (Avaloq), a leading Swiss financial software company

Scott Foster

🇯🇵 JAPAN • Fujitsu Fails to Failover > JPX Tries to Pass the Buck

FAILOVER FAILURE - Thu

Campbell Gunn

NTT – NTT Is Going Big and Our Suspicions Are Aroused Further

The explanation supporting NTT’s buyout of Docomo (in Japanese but translated below) is interesting and we believe it supports our initial thoughts...

Mio Kato

🇯🇵 JAPAN • The Hundred Days War - COVID Heroes & Villains

THE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing...

Campbell Gunn

NEC (6701 JP): Tie-Up with NTT Raises 5G Profile

On June 25, NEC (Japan's leading producer of telecom equipment) and NTT (9432 JP) (Japan's largest telecom network operator) announced plans for...

Scott Foster

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