Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Applying a deconsolidated book value for the unlisted operations, I see <a href="https://www.smartkarma.com/entities/gmo-internet-inc" target="_blank" data-smartkarma-citation="entities:13631:1" rel="noopener">GMO Internet (9449 JP)</a> at a ~30% discount to NAV, a reasonable level for an active holding company structure with eight listed subsidiaries.
It is the complexity of the holdings, both listed and unlisted, and the inability to look through into the financials of the key operating segments, that suggest the 54% gain in the past twelve months is overdone.
Gaining traction on the merits of the unlisted ops at the Holdco have proven to be fleeting, as seen with GMO-i's cryptocurrency frenzy in 2018. The division remains profitable, however, the top-line revenue in the most recent quarter of ¥1.57bn is the second-lowest since the 2018 June-end quarter peak. Shares bottomed out on the 25 December 2018 at ¥1,325 - its lowest level since Aug 2017 and down 56% from its June 2018 high - the same day GMO-i announced a cryptocurrency-related impairment of  <a href="https://ir.gmo.jp/en/pdf/irlibrary/gmo_disclose_info20181225_e.pdf" target="_blank" rel="noopener">¥35.5bn</a>.
Returns from the incubation segment are lumpy with limited visibility; the internet advertising segment recently recorded its second-lowest quarterly operating profit in the last thirteen years; leaving the core competitiveness and inaugural internet infrastructure businesses, which continue to eke out new highs, and the internet finance business. 
Given current levels, the opaqueness within the Holdco structure, and perhaps ambitious thinking value can be unlocked via ongoing activism; the recommendation is to be directly invested with the listed subsidiaries in place of the parent.

Applying a deconsolidated book value for the unlisted operations, I see GMO Internet (9449 JP) at a ~30% discount to NAV, a reasonable level for an active holding company structure with eight listed subsidiaries.
It is the complexity of the holdings, both listed and unlisted, and the inability to look through into the financials of the key operating segments, that suggest the 54% gain in the past twelve months is overdone.
Gaining traction on the merits of the unlisted ops at the Holdco have proven to be fleeting, as seen with GMO-i's cryptocurrency frenzy in 2018. The division remains profitable, however, the top-line revenue in the most recent quarter of ¥1.57bn is the second-lowest since the 2018 June-end quarter peak. Shares bottomed out on the 25 December 2018 at ¥1,325 - its lowest level since Aug 2017 and down 56% from its June 2018 high - the same day GMO-i announced a cryptocurrency-related impairment of  ¥35.5bn.
Returns from the incubation segment are lumpy with limited visibility; the internet advertising segment recently recorded its second-lowest quarterly operating profit in the last thirteen years; leaving the core competitiveness and inaugural internet infrastructure businesses, which continue to eke out new highs, and the internet finance business. 
Given current levels, the opaqueness within the Holdco structure, and perhaps ambitious thinking value can be unlocked via ongoing activism; the recommendation is to be directly invested with the listed subsidiaries in place of the parent.

Equity Analyst, LightStream Research

Supun Walpola

Equity Analyst

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>
<a href="https://www.smartkarma.com/entities/recruit-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:15070:1" rel="noopener">Recruit Holdings (6098 JP)</a>’s revenue exposure to the Japanese and global labour markets is around 84% which makes it cyclical and susceptible to macro trends. </li></ul><ul><li>Recruit’s share price has increased by nearly 4x over the past five years, putting the company’s valuation at a premium, both historically and against its peers. </li></ul><ul><li>This was on the back of a strong 5-year revenue CAGR of 14.2%, underpinned by both Japanese and global unemployment reaching historical lows. </li></ul><ul><li>However, with global labour markets starting to slow down, and hiring stalls, we believe Recruit’s growth will be hampered in the medium term. Our base case for Recruit assumes a 3-year revenue CAGR of 6.5% over FY03/19-22E. </li></ul><ul><li>Our NTM target price for Recruit is ¥3,235, which is 20% downside from the current market price of JPY 4,049 (as of 20th December 2019). </li></ul><ul><li>Upside risks to our thesis are limited. Global unemployment levels have already bottomed out. Hence, even if current tensions do wear-off, and global economies start heating up, we see only a little upside in labour/employment markets. Our bull case for Recruit is at ¥4,260 – an upside of only 5%. </li></ul><ul><li>Global labour markets are giving mixed signals; unemployment has bottomed out, but job growth is stalled. Should global economic tensions hold, we could see unemployment rates gradually start rising from next year onwards.</li></ul>


Recruit Holdings (6098 JP)’s revenue exposure to the Japanese and global labour markets is around 84% which makes it cyclical and susceptible to macro trends. Recruit’s share price has increased by nearly 4x over the past five years, putting the company’s valuation at a premium, both historically and against its peers. This was on the back of a strong 5-year revenue CAGR of 14.2%, underpinned by both Japanese and global unemployment reaching historical lows. However, with global labour markets starting to slow down, and hiring stalls, we believe Recruit’s growth will be hampered in the medium term. Our base case for Recruit assumes a 3-year revenue CAGR of 6.5% over FY03/19-22E. Our NTM target price for Recruit is ¥3,235, which is 20% downside from the current market price of JPY 4,049 (as of 20th December 2019). Upside risks to our thesis are limited. Global unemployment levels have already bottomed out. Hence, even if current tensions do wear-off, and global economies start heating up, we see only a little upside in labour/employment markets. Our bull case for Recruit is at ¥4,260 – an upside of only 5%. Global labour markets are giving mixed signals; unemployment has bottomed out, but job growth is stalled. Should global economic tensions hold, we could see unemployment rates gradually start rising from next year onwards.

Global Labour Markets Are Starting to Slow Down – Time To "Lay Off" Recruit

'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. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/102/990/original/2019-10-23_10-27-15.png?1571794053" class="editor-image img-responsive" data-smartkarma-image-id="102990"></figure><div class="content-caption">Source: Japan Analytics  [▲ - Buy Recommendations ▼ Profit-taking Recommendation]</div>BACK TO PASONA - Since our Insight <a href="https://www.smartkarma.com/insights/2168-pasona-third-quarter-results-time-to-take-some-profits" target="_blank" data-smartkarma-citation="insights:29139" rel="noopener">Time to Take Some Profits</a> of 12th April, Pasona shares have declined by 10%, underperforming the market by 12% over that period. The company has also released 2019 full-year and 2020 first-quarter results - the latter being poorly-received and providing further evidence that Pasona remains committed to its 'social' agenda. Pasona's stake in <a href="https://www.smartkarma.com/entities/benefit-one-inc" target="_blank" data-smartkarma-citation="entities:14502:1" rel="noopener">Benefit One (2412 JP)</a> has also been further reduced to just over 50%. For those interested in playing the relative value of Pasona and its stake in Benefit One, the current weakness provides an opportunity to add to positions.

Source: Japan Analytics  [▲ - Buy Recommendations ▼ Profit-taking Recommendation]BACK TO PASONA - Since our Insight Time to Take Some Profits of 12th April, Pasona shares have declined by 10%, underperforming the market by 12% over that period. The company has also released 2019 full-year and 2020 first-quarter results - the latter being poorly-received and providing further evidence that Pasona remains committed to its 'social' agenda. Pasona's stake in Benefit One (2412 JP) has also been further reduced to just over 50%. For those interested in playing the relative value of Pasona and its stake in Benefit One, the current weakness provides an opportunity to add to positions. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/084/756/original/2019-04-12_10-46-23.png?1555033615" class="editor-image img-responsive" data-smartkarma-image-id="84756"></figure><div class="content-caption">Source: Japan Analytics</div>Q3 UPDATE - <a href="https://www.smartkarma.com/entities/15778" target="_blank" data-smartkarma-citation="entities:15778:1">Pasona Group (2168 JP)</a> released their third-quarter results on April 10th. Pasona shares have risen by 46% since our initial recommendation <a href="https://www.smartkarma.com/insights/pasona-non-grata" target="_blank" data-smartkarma-citation="insights:26973">Pasona Non-Grata</a> of January 3rd, by 28% since our <a href="https://www.smartkarma.com/insights/pasona-interim-update-still-more-upside" target="_blank" data-smartkarma-citation="insights:27302">Interim Update - Still More Upside</a> and by 73% from the December 'trough' to recent peak. With the upside accordingly to our valuation methodologies being more limited, we would recommend some profit-taking.

Source: Japan AnalyticsQ3 UPDATE - Pasona Group (2168 JP) released their third-quarter results on April 10th. Pasona shares have risen by 46% since our initial recommendation Pasona Non-Grata of January 3rd, by 28% since our Interim Update - Still More Upside and by 73% from the December 'trough' to recent peak. With the upside accordingly to our valuation methodologies being more limited, we would recommend some profit-taking.    

2168 🇯🇵 Pasona • Third Quarter Results - Time to Take Some Profits

Quantitative Analysis

- MARKET COMPOSITE -<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/081/436/original/2019-03-10_11-07-01.png?1552183736" class="editor-image img-responsive" data-smartkarma-image-id="81436"></figure><div style="text-align: center;" class="content-caption">Source: Japan Analytics</div><div>
SOUTHBOUND - The upside we anticipated two weeks ago turned out to be only ¥6t before the harsh realities of some weak macro data intervened and sent the market 3% lower over the last two trading days suggesting the bear market rally is now over. After peaking at 48%, the market-value-based percentage above the weighted sum of moving averages has now retreated to 33%. </div><hr>- SECTORS - <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/081/437/original/2019-03-10_11-38-43.png?1552185548" class="editor-image img-responsive" data-smartkarma-image-id="81437"></figure><div style="text-align: left;" class="content-caption">
LEGEND: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.</div>SECTOR BREAKDOWN - The top six sectors remain domestic and defensive and are unchanged from two weeks ago with REITs, the clear leader. Equally predictable is the bottom half-dozen - Banks, Non-Bank Finance, Retail, Autos, and Metals remain from two weeks ago, with Machinery replacing Construction. Banks stay at the bottom, and the sector had its largest volume 'day' as measured by our Volume Score since September 21st, 2018 on Friday although many other sectors were 'active.' <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/081/440/original/2019-03-10_11-54-26.png?1552186476" class="editor-image img-responsive" data-smartkarma-image-id="81440"></figure><div class="content-caption">Source: Japan Analytics</div><hr>- COMPANIES -COMPANY MOVING AVERAGE OUTLIERS - As with the Market Composite and Sectors, the Moving Average Outlier indicator uses a weighted sum of each company's share price relative to its 5-day, 20-day, 60-day, 120-day and 240-day moving averages. 'Extreme' values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. <div class="content-highlight">
In the DETAIL section below, we highlight the current top and bottom twenty-five large capitalisation outliers, as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
Our most extreme positive outlier two weeks ago, <a href="https://www.smartkarma.com/entities/26181" target="_blank" data-smartkarma-citation="entities:26181:1">Pksha Technology (3993 JP)</a> declined by 8% and 'tops' our most negative two-week change list, while the most negative outlier <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a> rose by 3%. <a href="https://www.smartkarma.com/entities/8244" target="_blank" data-smartkarma-citation="entities:8244:1">Leopalace21 (8848 JP)</a> which was also featured recovered by 9%.
<a href="https://www.smartkarma.com/entities/2709" target="_blank" data-smartkarma-citation="entities:2709:1">AnGes (4563 JP)</a> is currently the most extreme large cap positive outlier having peaked at '492' on 26th February up from a 'trough' of -132 in December. Biotechnology peer <a href="https://www.smartkarma.com/entities/24540" target="_blank" data-smartkarma-citation="entities:24540:1">SanBio (4592 JP)</a> is, for the third time this year, the most extreme negative outlier, having topped the 13th January and 24th February positive outlier lists and is another 'round-tripper'. 
</div><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/081/441/original/2019-03-10_12-13-00.png?1552187591" class="editor-image img-responsive" data-smartkarma-image-id="81441"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/081/442/original/2019-03-10_12-17-48.png?1552187878" class="editor-image img-responsive" data-smartkarma-image-id="81442"></figure>Source: Japan Analytics
</div>

- MARKET COMPOSITE -Source: Japan Analytics
SOUTHBOUND - The upside we anticipated two weeks ago turned out to be only ¥6t before the harsh realities of some weak macro data intervened and sent the market 3% lower over the last two trading days suggesting the bear market rally is now over. After peaking at 48%, the market-value-based percentage above the weighted sum of moving averages has now retreated to 33%. - SECTORS - 
LEGEND: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.SECTOR BREAKDOWN - The top six sectors remain domestic and defensive and are unchanged from two weeks ago with REITs, the clear leader. Equally predictable is the bottom half-dozen - Banks, Non-Bank Finance, Retail, Autos, and Metals remain from two weeks ago, with Machinery replacing Construction. Banks stay at the bottom, and the sector had its largest volume 'day' as measured by our Volume Score since September 21st, 2018 on Friday although many other sectors were 'active.' Source: Japan Analytics- COMPANIES -COMPANY MOVING AVERAGE OUTLIERS - As with the Market Composite and Sectors, the Moving Average Outlier indicator uses a weighted sum of each company's share price relative to its 5-day, 20-day, 60-day, 120-day and 240-day moving averages. 'Extreme' values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. 
In the DETAIL section below, we highlight the current top and bottom twenty-five large capitalisation outliers, as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
Our most extreme positive outlier two weeks ago, Pksha Technology (3993 JP) declined by 8% and 'tops' our most negative two-week change list, while the most negative outlier SanBio (4592 JP) rose by 3%. Leopalace21 (8848 JP) which was also featured recovered by 9%.
AnGes (4563 JP) is currently the most extreme large cap positive outlier having peaked at '492' on 26th February up from a 'trough' of -132 in December. Biotechnology peer SanBio (4592 JP) is, for the third time this year, the most extreme negative outlier, having topped the 13th January and 24th February positive outlier lists and is another 'round-tripper'. 

Source: Japan Analytics


🇯🇵 Japan: Moving Average Outliers - AnGes, SanBio, Adastria, AIN, Sumco & Benefit One

Japan

Pasona Group Inc. manages companies that provide placement and staffing services for clients in the information technology sector.

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Pasona Group (2168 JP)

GMO Internet: Listed Holdings Preferred

Applying a deconsolidated book value for the unlisted operations, I see GMO Internet (9449 JP) at a ~30% discount to NAV, a reasonable level for an...

David Blennerhassett

Global Labour Markets Are Starting to Slow Down – Time To "Lay Off" Recruit

Recruit Holdings (6098 JP)’s revenue exposure to the Japanese and global labour markets is around 84% which makes it cyclical and susceptible to...

Supun Walpola

2168 🇯🇵 Pasona • Time to Revisit

BACK TO PASONA - Since our Insight Time to Take Some Profits of 12th April, Pasona shares have declined by 10%, underperforming the market by 12%...

Campbell Gunn

2168 🇯🇵 Pasona • Third Quarter Results - Time to Take Some Profits

Q3 UPDATE - Pasona Group (2168 JP) released their third-quarter results on April 10th. Pasona shares have risen by 46% since our initial...

Campbell Gunn

🇯🇵 Japan: Moving Average Outliers - AnGes, SanBio, Adastria, AIN, Sumco & Benefit One

- MARKET COMPOSITE - SOUTHBOUND - The upside we anticipated two weeks ago turned out to be only ¥6t before the harsh realities of some weak macro...

Campbell Gunn

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