Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

Rakuten posted Q1 results ahead of Redex forecasts flattered by ¥30bn in one-time investment gains but otherwise in-line. We see two clear takeaways from the quarter: 1) eCommerce GMV growth moderated after a punchy Q4 outpaced Z Holdings for a second consecutive quarter; and 2) mobile operating losses have accelerated as the company ramps up investment in infrastructure and customer acquisition. Strategically, Rakuten made great progress in the quarter with new equity and debt funding and approval from Apple to sell the iPhone. That makes us more optimistic on hopes for mobile but operating losses come first and we think the company is fairly valued in the near-term.

Rakuten posted Q1 results ahead of Redex forecasts flattered by ¥30bn in one-time investment gains but otherwise in-line. We see two clear takeaways from the quarter: 1) eCommerce GMV growth moderated after a punchy Q4 outpaced Z Holdings for a second consecutive quarter; and 2) mobile operating losses have accelerated as the company ramps up investment in infrastructure and customer acquisition. Strategically, Rakuten made great progress in the quarter with new equity and debt funding and approval from Apple to sell the iPhone. That makes us more optimistic on hopes for mobile but operating losses come first and we think the company is fairly valued in the near-term.

Rakuten Group: Q1 21 Results - Profit Beat on One-Time Gains/Mobile Investment Accelerates

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. 

<a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a>  had a great 2020, boosted in part by consumers’ buying online in the pandemic but also because of longer-term strategic changes to its business – and its new collaborative engagement with its majority shareholder, <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>. While there may be a short-term correction once consumers return to stores, Zozo’s current operations and its future plans are so much stronger and more viable than two years ago that it is likely to emerge as a contender to be 2nd in apparel rankings behind Uniqlo.OPM should also improve on the back of category expansion into high ticket items such as luxury and designer brands.Zozo is also working on a plan to create new sources of profit that don’t rely on ever-growing GTVs, with a target of hitting ¥100 billion in operating profit in the next few years. The three areas where Zozo expects to find new revenues are in:<ol>
<li>Increasing traffic for non-shopping activities </li>
<li>Expanding its role in design and production through private/D2C brands, and </li>
<li>Selling technology licenses overseas.</li>
</ol>Zozo's renewed strategic direction and controlled management should deliver a smoother and more consistent progress than in recent years.

ZOZO Inc (3092 JP)  had a great 2020, boosted in part by consumers’ buying online in the pandemic but also because of longer-term strategic changes to its business – and its new collaborative engagement with its majority shareholder, Z Holdings (4689 JP). While there may be a short-term correction once consumers return to stores, Zozo’s current operations and its future plans are so much stronger and more viable than two years ago that it is likely to emerge as a contender to be 2nd in apparel rankings behind Uniqlo.OPM should also improve on the back of category expansion into high ticket items such as luxury and designer brands.Zozo is also working on a plan to create new sources of profit that don’t rely on ever-growing GTVs, with a target of hitting ¥100 billion in operating profit in the next few years. The three areas where Zozo expects to find new revenues are in:
Increasing traffic for non-shopping activities 
Expanding its role in design and production through private/D2C brands, and 
Selling technology licenses overseas.
Zozo's renewed strategic direction and controlled management should deliver a smoother and more consistent progress than in recent years.

<a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a>  posted results for Q4 ahead of Redex / consensus expectations with FY21 guidance that is better than our forecasts but worse than consensus. Importantly, the company is targeting flat operating income YoY despite meaningful mobile price reductions as profit growth from Enterprise sales, Distribution, and Internet offset consumer erosion. The only disappointment in the results may be an unchanged dividend and whilst the company did not close the door on increases later in the year, there was not much enthusiasm either. Still, with results and guidance that are largely better than our expectations, we remain at Buy.

Softbank Corp (9434 JP)  posted results for Q4 ahead of Redex / consensus expectations with FY21 guidance that is better than our forecasts but worse than consensus. Importantly, the company is targeting flat operating income YoY despite meaningful mobile price reductions as profit growth from Enterprise sales, Distribution, and Internet offset consumer erosion. The only disappointment in the results may be an unchanged dividend and whilst the company did not close the door on increases later in the year, there was not much enthusiasm either. Still, with results and guidance that are largely better than our expectations, we remain at Buy. 

Softbank Corp Q4 20 Results/FY21 Guidance – Holding the Line on Mobile Pricing Changes

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

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?)

Thematic (Sector/Industry)

The past nine months have been a wild ride. The industry has largely avoided the disruption of Covid-19 but NTT’s ¥4 trillion DoCoMo restructuring and regulatory-driven price reductions have shaken things up whilst competition from Rakuten is likely to heat up as it raises cash and accelerates investment. Mobile revenues will be down but that can be made up in other areas and whilst profitability in FY21 is flat at best and likely down modestly, shareholder returns are stable to growing.  NTT and KDDI are top picks with Softbank offering modest upside whilst we are more cautious on Rakuten after a 46% YTD run which largely captures the upside potential a more competitive mobile service offers.

The past nine months have been a wild ride. The industry has largely avoided the disruption of Covid-19 but NTT’s ¥4 trillion DoCoMo restructuring and regulatory-driven price reductions have shaken things up whilst competition from Rakuten is likely to heat up as it raises cash and accelerates investment. Mobile revenues will be down but that can be made up in other areas and whilst profitability in FY21 is flat at best and likely down modestly, shareholder returns are stable to growing.  NTT and KDDI are top picks with Softbank offering modest upside whilst we are more cautious on Rakuten after a 46% YTD run which largely captures the upside potential a more competitive mobile service offers.

Japan Telecom Sector: FY21 Will Be Tougher and More Competitive but Returns Can Still Rise

Japan

LY Corporation operates as an internet search engine "Yahoo! JAPAN". The Company provides electronic commerce and settlement finance services for small medium enterprises and individuals. LY also operates media business including search linked advertising and display advertising services.

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LY (4689 JP)

Rakuten Group: Q1 21 Results - Profit Beat on One-Time Gains/Mobile Investment Accelerates

Rakuten Q1 results were in line with expectations outside one-time gains that flattered profitability. Operationally, eCommerce looks good and...

Kirk Boodry

Zozo: Record Sales and a Future Plan

Zozo has turned the corner on the upsets around the time of the founder's exit with clear signs of management stability and strategic, long-term...

Michael Causton

Softbank Corp Q4 20 Results/FY21 Guidance – Holding the Line on Mobile Pricing Changes

Softbank Corp says it will maintain profitability despite regulatory-driven mobile price cuts. The dividend will also be unchanged although...

Kirk Boodry

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

Japan Telecom Sector: FY21 Will Be Tougher and More Competitive but Returns Can Still Rise

FY21 will be a tough year for mobile with 5% service revenue erosion but new services provide some offset and returns to shareholders can still...

Kirk Boodry

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