Research from Asian Century Stocks, Asian Century Stocks

Michael Fritzell

Research from Asian Century Stocks

Providing financial journalism in the Asia-Pacific

Asian Century Stocks

Asian Century Stocks is a newsletter providing financial journalism for companies and stocks in the Asia-Pacific. 
The Asian Century Stocks logotype “百” stands for “one hundred” or a “century”. The economic centre of gravity is moving towards Asia. Yet most global investors are missing out.

Equity Bottom-Up

<h2>Nintendo: Weighing the bull &amp; bear case</h2>
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This week, I’ve decided to do something a little bit different. I asked Asian Century Stocks members on <a href="https://twitter.com/AsianCenturyStx/status/1411533672088412162" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://twitter.com/AsianCenturyStx/status/1411533672088412162&amp;source=gmail&amp;ust=1625792906595000&amp;usg=AFQjCNGkMC2C1bavo3fptA_UJy0enUFHfQ" rel="noopener">Twitter</a> to suggest a stock for me to review.
There was an overwhelming demand for me to review <a href="https://sg.finance.yahoo.com/quote/7974.T/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://sg.finance.yahoo.com/quote/7974.T/&amp;source=gmail&amp;ust=1625792906595000&amp;usg=AFQjCNGgNPwG1jzFXWg2YNGBB4U7Zu5i_Q" rel="noopener">Nintendo</a> (7974 JP / NTDOY US). So here we go:
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Nintendo: Weighing the bull &amp; bear case



This week, I’ve decided to do something a little bit different. I asked Asian Century Stocks members on Twitter to suggest a stock for me to review.
There was an overwhelming demand for me to review Nintendo (7974 JP / NTDOY US). So here we go:




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.

We had previously expected an upgraded Nintendo Switch to feature some form of 4K support through Nvidia’s DLSS technology and for this to rejuvenate hardware sales going into next fiscal year. The announcement of the OLED Switch does not meet this criterion and we thus expect hardware sales to decline going forward, albeit in a gentler fashion than in prior cycles.

We had previously expected an upgraded Nintendo Switch to feature some form of 4K support through Nvidia’s DLSS technology and for this to rejuvenate hardware sales going into next fiscal year. The announcement of the OLED Switch does not meet this criterion and we thus expect hardware sales to decline going forward, albeit in a gentler fashion than in prior cycles.

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

On Friday 11 June, the TSE published its final revisions to the Corporate Governance Code which had been undergoing review by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and subsequently comment for the past many months. The new Code went into effect as of 11 June. The first revision to the Guidelines for Investor and Company Engagement were published as well. The new version of Japan's Corporate Governance Code is <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l07.pdf" target="_blank" rel="noopener">here</a> with the tracked change version <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l0c.pdf" target="_blank" rel="noopener">here</a>. This is the second revision of the Code (the first revision was in 2018).The revisions to the JFSA Guidelines for Investor and Company Engagement are <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l3e.pdf" target="_blank" rel="noopener">here</a>. Tracked changes are <a href="https://www.jpx.co.jp/english/news/1020/b5b4pj0000046kxj-att/b5b4pj0000046l50.pdf" target="_blank" rel="noopener">here</a>.The major changes to the Code recommend enhancements to Board independence, diversity, Sustainability and ESG, and also recommend improvements to investor accessibility and voting and a small change to listed parent-listed subsidiary relationships which unfortunately will not do much to counter abuse by companies of listed sub minority shareholders. Below is more discussion of the changes and what they mean.But I remind investors, these changes are almost all box-ticking exercises. They will not improve governance for shareholders except at the margins. Companies which "get" good governance are still rare. And those which don't get it seem to abuse shareholders on a regular basis. And for that, investors still need more cowbell.

On Friday 11 June, the TSE published its final revisions to the Corporate Governance Code which had been undergoing review by the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code and subsequently comment for the past many months. The new Code went into effect as of 11 June. The first revision to the Guidelines for Investor and Company Engagement were published as well. The new version of Japan's Corporate Governance Code is here with the tracked change version here. This is the second revision of the Code (the first revision was in 2018).The revisions to the JFSA Guidelines for Investor and Company Engagement are here. Tracked changes are here.The major changes to the Code recommend enhancements to Board independence, diversity, Sustainability and ESG, and also recommend improvements to investor accessibility and voting and a small change to listed parent-listed subsidiary relationships which unfortunately will not do much to counter abuse by companies of listed sub minority shareholders. Below is more discussion of the changes and what they mean.But I remind investors, these changes are almost all box-ticking exercises. They will not improve governance for shareholders except at the margins. Companies which "get" good governance are still rare. And those which don't get it seem to abuse shareholders on a regular basis. And for that, investors still need more cowbell.

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

Event-Driven

In summer of 2016, I warned on Smartkarma that the BOJ was going to have to shift its ETF buy basket away from Nikkei 225. It did so in late 2016. I warned again in early 2018 that it was going to get worse, and suggested a revision to the Nikkei 225 Average methodology in <a href="https://www.smartkarma.com/insights/the-boj-s-ongoing-etf-impact-is-a-nikkei-225-reshuffle-in-the-cards" target="_blank" data-smartkarma-citation="insights:17331" rel="noopener">The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards?</a> (followed by <a href="https://www.smartkarma.com/insights/japan-passive-boj-heading-for-trouble-with-nikkei-225" target="_blank" data-smartkarma-citation="insights:21980" rel="noopener">JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225</a>) whereby there would be a deemed minimum shares outstanding quantity so that Deemed Minimum Shares Out / Shares out multiplied by Existing Deemed Par Value would become NEW Deemed Par Value.
This would mean that some names would see lower weights, but on the whole, the Nikkei 225 basket would be much more liquid. 
Nothing was done. The BOJ again lowered its use of Nikkei 225 ETFs, then recently finally stopped using the average altogether. 
The Nikkei 225 had been made largely irrelevant by the Nikkei's refusal to adapt to the times.
<h2>The NEW News</h2>
Today after the close, the Nikkei Index Team announced the first proposed revision to the methodology of the Nikkei 225 Average in twenty years, and a consultation over the next five weeks. Because the concept of Par Value is no longer used in Japan in the Companies Act, it would get rid of the "Presumed Par Value" or "Deemed Par Value" for members and potential members of the Average, and replace it with a Price Adjustment Factor ("PAF") which is an inverse multiplier of the Deemed Par Value. 
In short.... it would do nothing to the index and its constituents as they stand today.
And new additions would be assigned a PAF which would presumably be related to their previously understood Deemed Par Value. But in any case, new constituents would be capped at 1% weightings so would see their Price Adjustment Factor.... adjusted. 
There are other changes proposed which change the rebalancing possibilities, and there is a note that the Average would only include members of TSE Prime (such that existing TSE1 and Nikkei 225 members which chose not to become members of TSE Prime would find themselves booted from the Nikkei 225. 
This is highly disappointing. A 20-year review could have been so much more interesting and the Nikkei could have rescued itself from effective oblivion. Alas, this misses the mark, by a wide margin. 
But details are details so we look at them below.

In summer of 2016, I warned on Smartkarma that the BOJ was going to have to shift its ETF buy basket away from Nikkei 225. It did so in late 2016. I warned again in early 2018 that it was going to get worse, and suggested a revision to the Nikkei 225 Average methodology in The BOJ's Ongoing ETF Impact - Is a Nikkei 225 Reshuffle in the Cards? (followed by JAPAN PASSIVE:  BOJ Heading For Trouble with Nikkei 225) whereby there would be a deemed minimum shares outstanding quantity so that Deemed Minimum Shares Out / Shares out multiplied by Existing Deemed Par Value would become NEW Deemed Par Value.
This would mean that some names would see lower weights, but on the whole, the Nikkei 225 basket would be much more liquid. 
Nothing was done. The BOJ again lowered its use of Nikkei 225 ETFs, then recently finally stopped using the average altogether. 
The Nikkei 225 had been made largely irrelevant by the Nikkei's refusal to adapt to the times.
The NEW News
Today after the close, the Nikkei Index Team announced the first proposed revision to the methodology of the Nikkei 225 Average in twenty years, and a consultation over the next five weeks. Because the concept of Par Value is no longer used in Japan in the Companies Act, it would get rid of the "Presumed Par Value" or "Deemed Par Value" for members and potential members of the Average, and replace it with a Price Adjustment Factor ("PAF") which is an inverse multiplier of the Deemed Par Value. 
In short.... it would do nothing to the index and its constituents as they stand today.
And new additions would be assigned a PAF which would presumably be related to their previously understood Deemed Par Value. But in any case, new constituents would be capped at 1% weightings so would see their Price Adjustment Factor.... adjusted. 
There are other changes proposed which change the rebalancing possibilities, and there is a note that the Average would only include members of TSE Prime (such that existing TSE1 and Nikkei 225 members which chose not to become members of TSE Prime would find themselves booted from the Nikkei 225. 
This is highly disappointing. A 20-year review could have been so much more interesting and the Nikkei could have rescued itself from effective oblivion. Alas, this misses the mark, by a wide margin. 
But details are details so we look at them below. 

After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?)

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Prestidigitation, or sleight of hand, is what stage magicians use to create their illusions, to the delight of the onlookers who are beguiled into looking elsewhere at a crucial moment in the conjuring trick when they might otherwise spot what the ‘magician’ is really doing.FY3/2021 results for <a href="https://www.smartkarma.com/entities/hachijuni-bank-ltd" target="_blank" data-smartkarma-citation="entities:20244:1" rel="noopener">Hachijuni Bank (8359 JP)</a> are, at first glance, impressive.  In difficult trading conditions, consolidated net profits sailed past the bank’s guidance by over 24% to ¥22.3 billion (a +1.4% YoY improvement over FY3/2020).  Management has generously raised the final dividend by 33% from ¥6/share to ¥8/share. But this was simply continuing a dividend policy that management has practiced most years since FY3/2017: a ¥6/share interim dividend and an ¥8/share final dividend.  Let us not forget that guidance for FY3/2021 was withheld by management until 30 October 2020, so well into the financial year.  And bottom-line profits relied heavily on ¥6.3 billion in 2nd Half gains from  ‘selling the family silver’, namely realizing gains on part of the bank’s share portfolio as global stock markets fortuitously rose.  Moreover, trading gains of ¥9.9 billion were needed to offset a six-fold rise in credit costs from ¥1.4 billion to ¥9.3 billion because the bank’s collection of non-performing loans rose by 29.3% to ¥101.1 billion in a single year: primarily in loans in ‘high risk’ categories.  The quality of reported profits is indeed strained.In terms of balance-sheet efficiency, the bank’s return on assets (RoA) has deteriorated further to just 20bps, while its return on equity (RoE) is a risible 2.70%.  With flat profits being forecast for FY3/2022, and trading on an unremarkable PER of 8.1x, there are far better investments in the Japanese banking sector than this.  For those who are not yet holders of Hachijuni Bank stock but may have noticed the apparent strong recovery in the bank’s profitability according to its FY3/2021 financial statements, our position is clear: Caveat emptor! (May the buyer beware!)

Prestidigitation, or sleight of hand, is what stage magicians use to create their illusions, to the delight of the onlookers who are beguiled into looking elsewhere at a crucial moment in the conjuring trick when they might otherwise spot what the ‘magician’ is really doing.FY3/2021 results for Hachijuni Bank (8359 JP) are, at first glance, impressive.  In difficult trading conditions, consolidated net profits sailed past the bank’s guidance by over 24% to ¥22.3 billion (a +1.4% YoY improvement over FY3/2020).  Management has generously raised the final dividend by 33% from ¥6/share to ¥8/share. But this was simply continuing a dividend policy that management has practiced most years since FY3/2017: a ¥6/share interim dividend and an ¥8/share final dividend.  Let us not forget that guidance for FY3/2021 was withheld by management until 30 October 2020, so well into the financial year.  And bottom-line profits relied heavily on ¥6.3 billion in 2nd Half gains from  ‘selling the family silver’, namely realizing gains on part of the bank’s share portfolio as global stock markets fortuitously rose.  Moreover, trading gains of ¥9.9 billion were needed to offset a six-fold rise in credit costs from ¥1.4 billion to ¥9.3 billion because the bank’s collection of non-performing loans rose by 29.3% to ¥101.1 billion in a single year: primarily in loans in ‘high risk’ categories.  The quality of reported profits is indeed strained.In terms of balance-sheet efficiency, the bank’s return on assets (RoA) has deteriorated further to just 20bps, while its return on equity (RoE) is a risible 2.70%.  With flat profits being forecast for FY3/2022, and trading on an unremarkable PER of 8.1x, there are far better investments in the Japanese banking sector than this.  For those who are not yet holders of Hachijuni Bank stock but may have noticed the apparent strong recovery in the bank’s profitability according to its FY3/2021 financial statements, our position is clear: Caveat emptor! (May the buyer beware!)  

Hachijuni Bank (8359 JP):  A Case of Prestidigitation?

Japan

Nintendo Co., Ltd. globally develops, manufactures and sells home-use video game hardware and software in home entertainment business.  The company also produces home-game products including cards.

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Nintendo (7974 JP)

Nintendo: Weighing the Bull & Bear Case

I will go through the main bullish and main bearish arguments for Nintendo and then wrap up with an expected earnings trajectory and how the stock...

Asian Century Stocks

Nintendo – Busted Catalyst

Nintendo's OLED Switch does not meet the criterion for a strong upside catalyst and we expect hardware sales to decline going forward, albeit in a...

Mio Kato

TSE Prime: Japan's Corporate Governance Code Finalized So Boxes Will Be Furiously Ticked

The TSE on Friday announced the revisions to the Governance Code. This codifies the "governance thresholds" required to join TSE Prime next year....

Travis Lundy

After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?)

TWENTY YEARS after its last major index methodology review, the Nikkei has proposed changes to the Nikkei 225. Existing constituents are not...

Travis Lundy

Hachijuni Bank (8359 JP): A Case of Prestidigitation?

Prestidigitation, or sleight of hand, is what magicians use to create their illusions. Onlookers are beguiled into looking elsewhere at a crucial...

J. Brian Waterhouse

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