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Japan

Japan: Sony Corp, FamilyMart Co Ltd, Toshiba Corp, Money Forward, Mitsui Fudosan Logistics Park Inc and more

By | Daily Briefs, Japan

In today’s briefing:

  • Sony – What the PS5 Showcase Says About Gaming Ecosystems
  • Familymart: What’s Next? And Will Mitsubishi React?
  • Toshiba Is A Range Trade. Still.
  • Small Cap Growth: Money Forward (3994) – Be Audit You Can Be
  • Mitsui Fudosan Logistics Park Placement – Large Deal but Minimal Accretion

Sony – What the PS5 Showcase Says About Gaming Ecosystems

By Mio Kato

Sony’s just concluded PS5 showcase finally revealed pricing at $500, with the digital version coming in at $400. These prices have been speculated on for some time and are not a real surprise though we did believe there was a possibility Sony would have tried to undercut Microsoft slightly. There were some small surprises in terms of exclusivity and the new PlayStation Plus Collection, however, and we discuss these below.


Familymart: What’s Next? And Will Mitsubishi React?

By Michael Causton

Itochu Corp (8001 JP) has completed its buyout of Familymart (see Travis Lundy’s insights here, here, here and here). Itochu has clearly taken full advantage of a depressed Familymart share price and an opportunity for the trading house to begin more adventurous diversification of the convenience store business.

This will include moving into more types of food format, including its nascent hybrid store collaborations with supermarkets and drugstores and an upcoming push into e-commerce, but will also mean more integration with Itochu’s food wholesale business – which when combined is bigger than that of its arch rival, Mitsubishi Corp (8058 JP).

Mitsubishi and Itochu have been playing catch-up with each other for the last two decades in a race to build Japan’s first integrated food wholesale-retail businesses.

Now that Itochu has succeeded in its bid, the question remains whether Mitsubishi will now look to consolidate its own food retail assets like Lawson Inc (2651 JP) and Life Corp (8194 JP).


Toshiba Is A Range Trade. Still.

By Travis Lundy

In my initial first piece on the Kioxia (6600 JP) IPO on 28 August 2020 called Kioxia IPO – The Flow Dynamics I talked about the nature of who was going to be buying (and who was going to be sold to).

I also noted my initial reaction that the price might be too high at ¥3,960/share and an EV of close to ¥3.5trln.

My initial reaction is that the price may be too high and it could be revised downward. Given the fact that 65% of the offering goes to international investors, who are more inclined to provide their pricing input in a negative way, I think it eminently possible that the offering could be priced lower. I would not be surprised to see an offering price 10-25% lower than the ¥3960 proffered.

A New IPO Price Range

On Thursday 17 September it was reported that the Kioxia Holdings IPO Price Range would be set at ¥2800-3500/share making the new offering size top out at ¥334.3bn and the market cap at IPO price be ¥1.88trln – both top figures year-to-date in 2020. 

That is a drop of 11.6-29.3%, which is a bit more aggressive than I had expected. It means the immediate uplift to Toshiba is considerably smaller compared to their in-price. 

Since I wrote bearishly on Toshiba Corp (6502 JP) exactly a month ago in Toshiba TOPIX Inclusion – Jack Be Nimble, Jack Be Quick… the shares are down 13.9%, but only down about 3% since Toshiba: Kioxia IPO Impact & Activist Positioning on 30 August.

If the market reacts not badly to the news of a possibly sharply reduced Kioxia IPO price and the corollary that lower price means lower proceeds (now and in future on a mark-to-market basis) will reduce the payout to Toshiba shareholders in terms of buying back stock could have a negative effect on Toshiba shares. 

That is worth watching for. It might be worth buying to cover the short. 

A bit lower down it is worth going long again. 

More below the fold. 


Small Cap Growth: Money Forward (3994) – Be Audit You Can Be

By Mark Chadwick

  • Money Forward (3994 JP) provides online accounting software for Japan’s SMEs, providing all of the time-saving tools that small business owners need to grow. It is the Japanese version of Xero Ltd (XRO AU) or Quickbooks by Intuit Inc (INTU US) 
  • Money Forward (MF) and its domestic peer freee (4478 JP) dominate the Japanese online market, which is growing in the region of 60-70% YoY.
  • There is a huge addressable market with low online penetration. MF has the potential to build a strong competitive moat, in the absence of the global majors.
  • Today, MF looks similar to Xero in 2013. If MF follows the same growth trajectory, investors could be looking at a 9-bagger.  

Mitsui Fudosan Logistics Park Placement – Large Deal but Minimal Accretion

By Sumeet Singh

Mitsui Fudosan Logistics Park Inc (3471 JP) (MFLP) is looking to raise about US$450m to partially fund the acquisition of two new assets. 

This will be the second fund raising by the company this year. We covered the earlier deal in Jan 2020 in Mitsui Fudosan Logistics Park Placement – Less Dilutive and More Accretive than the Previous Deal. We also covered the prior Jan 2019 raising in, Mitsui Fudosan Logistics Park Placement – Accretive and Well-Flagged.


Before it’s here, it’s on Smartkarma

Japan: LINE Corp, Genky DrugStores Co Ltd, Mitsubishi Corp and more

By | Daily Briefs, Japan

In today’s briefing:

  • LINE: The Zombie Twilight Begins
  • Genky: Another Japanese Discount Winner
  • 🇯🇵 JAPAN • Analysing The “Buffett Trade”, Valuing the Sogo Shosha & The Return of Asian Inflation

LINE: The Zombie Twilight Begins

By Travis Lundy

The life of LINE Corp (3938 JP) as a listed entity with a listed future is now entering its Zombie Twilight. The Tender Offer by Softbank Corp (9434 JP) and Naver Corp (035420 KS) to buy out minorities has ended and we now move on to the next stage. 

Today the results of the Tender Offer for LINE were announced and the Offerors managed to acquire a sum total of 31,234,670 shares leaving about 25,000,000 shares left over un-tendered (plus options and converts un-converted). That is 25,000,000 million shares worth of zombie shareholders who will roam the markets until the shares’ final retirement after the EGM. 

That is $1.25bn+ worth of zombies at the Tender Offer Price. 

The now-zombies defended their boundary, keeping the shares above the ¥5380 Tender Offer Price line from late June until the day before the Tender Offer went ex-.

 

The period between now and the delisting of LINE could be 4-5 months. It could take 5-6 months to get one’s money, unless one is going after appraisal rights. Then it will take a little longer, unless it takes a lot longer. 

This situation is different from the post-Tender trading situation of FamilyMart Co Ltd (8028 JP) and one should not expect the squeeze which happened there. 

Previous insights related to this situation and the names involved are listed below.

Relevant Insights

Date Author Title

About Cashless Payments

13 Mar 2019 Michael Causton  Loyalty Points In Japan: More Loyalty, More Points and the Conduit to Cashless Payments 
2 Apr 2019 Mio Kato, CFA  Mercari: Why Mercari Is Likely to Be a Winner in the Cashless Wars 
28 Jun 2019 Supun Walpola  Paying with PayPay: A Deep Dive into Yahoo! Japan’s Mobile Payment Business 
6 Jan 2020 Michael Causton  Lawson and KDDI Join Forces in Cashless Payments War 
24 Jan 2020 Michael Causton  Mercari – Merpay Acquisition of Origami Pay Continues Cashless Consolidation 
15 Feb 2020 Michael Causton  Japan Payment Wars: NTT Docomo and Merpay/Origami to Attempt Catch up with PayPay and Rakuten 
20 Mar 2020 Michael Causton  Some Resistance to Cashless Payments in Japan 
28 Apr 2020 Michael Causton  Z Holdings and Yamato Create Fulfilment Service for All to Rival Rakuten and Amazon 
29 Jul 2020 Supun Walpola  Z Holdings [Alt Data]: PayPay Mall and PayPay Flea Market Continue to Disappoint 

About This Deal

14 Nov 2019 Travis Lundy Z and LINE, Sitting in a Tree… M.E.R.G.I.N… G…? 
18 Nov 2019 Travis Lundy LINE and Z, Sitting in a Tree… M.E.R.G.I.N.G! And a Tender Offer! 
26 Dec 2019 Travis Lundy NEW Deal for LINE (A Lot Like the Old Deal)
6 July 2020 Travis Lundy Market Is Pricing a LINE Bump – Should It? 
22 July 2020 Travis Lundy A LINE Bump – The Other Argument Against 
29 July 2020 Travis Lundy LINE (3938) – This Is Not the Kitchen Sink You Are Looking For 
3 August 2020 Travis Lundy The End of the LINE (3938) 

In addition to the above insights, Michael Causton’s The Zozo Revival: A New Private Brand of Many Names, Category Expansion, Merchants Return is worth a read to know more about Z Holdings going forward and Mio Kato, CFA‘s Zozo – Nice Results but It’s Just a COVID Bump takes the view that results announced last week were less impressive than the headline numbers.


Genky: Another Japanese Discount Winner

By Michael Causton

Although counted as a drugstore, Genky DrugStores Co Ltd (9267 JP) is one of Japan’s most food-focused discount retailers. The chain has grown rapidly in recent years, with sales up 19% in FY2019 to June alone. It now plans to double that volume over the next three years.

Of these new stores, some will be pure supermarkets (of a discount variety) as the company moves beyond drugstores. Last month, Genky opened its first supermarket or “delicious drugstore” as it calls it.

As indicated in other insights here, the Japanese discount sector is on a roll and likely to continue to do so for the next decade thanks to vast unsatisfied demand from consumer households under pressure.

Genky looks like being one of the beneficiaries.


🇯🇵 JAPAN • Analysing The “Buffett Trade”, Valuing the Sogo Shosha & The Return of Asian Inflation

By Campbell Gunn

Source for all charts & tables: Japan Analytics

THE BUFFETT TRADE – Much has already written on Berkshire Hathaway‘s purchase of stakes in Japan’s sogo shosha, including on this platform. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.

In this DETAIL section, we examine: –

  • the macro ‘logic’ driving these investments,
  • a more appropriate analytical and valuation methodology for these companies
  • the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. 

We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan’s trading houses are one of the world’s better deep value trades.


Before it’s here, it’s on Smartkarma

Japan: Gremz Inc, World Co Ltd and more

By | Daily Briefs, Japan

In today’s briefing:

  • TOPIX Inclusion Pre-Event Trade (3150 JP): Tachiaigai Bunbai Announced. It’s GREEN.
  • Japan’s Big Apparel Trouble: World to Close 350 More Stores

TOPIX Inclusion Pre-Event Trade (3150 JP): Tachiaigai Bunbai Announced. It’s GREEN.

By Janaghan Jeyakumar, CFA

Gremz Inc (3150 JP) announced (J-only) a tachiaigai bunbai (equity offering) today stating that they intend to work towards achieving the Section Transfer requirements to move from TSE2 to TSE1. 

The shares for sale will be coming from controlling shareholder Masaomi Tanaka’s holdings.  

The Offering will place up to 878,000 shares with a maximum limit of 800 shares per buyer. The Offering is scheduled to take place from 25th September to 2nd October 2020. The Offer Price will be set at a discount to the last close prior to the Offer Date. Usually the Offer Date is the first day in the period.

As always, there is more below the fold. 


Japan’s Big Apparel Trouble: World to Close 350 More Stores

By Michael Causton

Apparel groups are in trouble, as Renown Inc (3606 JP)’s bankruptcy and Sanyo Shokai (8011 JP)’s boardroom battles exemplify, but World Co Ltd (3612 JP) always claimed it was in better shape – particularly just before relisting.

The Kobe-based firm has now admitted even its shopping mall chains need fixing, with a raft of closures due soon but, unlike competitors, it does have real growth businesses including its new Off Price chain, &Bridge and is in much better shape than competitors – but all things are relative, with the apparel sector showing clear signs of dysfunction with more closures and bankruptcies to follow.

Their demise will leave more room for the better-performing retailers and brands.


Before it’s here, it’s on Smartkarma

Japan: Softbank Corp, Softbank Group, Yukiguni Maitake, Gift Inc and more

By | Daily Briefs, Japan

In today’s briefing:

  • Softbank Corp (9434) – Time To Cover
  • Softbank – Interpreting the Arm Sale
  • Yukiguni Maitake IPO: Bain’s Remaining 6.65% Ownership Is an Overhang
  • TOPIX Inclusion (9279 JP): Gift Inc

Softbank Corp (9434) – Time To Cover

By Travis Lundy

When the Softbank Corp (9434 JP) block was announced on 28 August after the close, it was one of the larger secondary blocks ever placed in Japan, and it was underwritten.

It was always going to get sold rather than bought, and it appears that it has been sold. For some reason I could not figure out, the shares only fell 3-4% or so on the first day and then stayed stable for a few days. I thought it needed more of a wallop to see pricing come out right. 

It has, in the interim, been walloped. 

Now is the time to cover that sale in the market if you shorted, and to buy back if you sold long. 

The implied dividend yield on the offering is now (as I write) above 7%. Suganomics may not favor telcos but I expect the telcos probably have enough leverage to push back from time to time. 

More below the fold.


Softbank – Interpreting the Arm Sale

By Mio Kato

So the Arm sale is finally here, as is the $40bn that Softbank was looking for… sort of. We had commented previously that we felt Softbank’s mark for Arm was optimistic (this could be debated now but we actually feel this acquisition lends credence to this view), the acquisition would probably be heavy on the share component, and that exclusion of Arm’s IoT business from the deal would be a no-confidence vote from Nvidia and a repudiation of Son’s “Vision”. On the latter point we believe we were correct.


Yukiguni Maitake IPO: Bain’s Remaining 6.65% Ownership Is an Overhang

By Oshadhi Kumarasiri

Yukiguni Maitake (1378 JP), the market leader in Maitake mushrooms, has priced its shares at ¥2,200 per share, at the mid-point of the IPO price range (¥2,000-2,400). The book-building period ended on Tuesday, and the final offer price was announced on Wednesday 9th September.

Furthermore, it was also decided that the shares will be listed on the 1st section of the Tokyo Stock Exchange from 17th September 2020 under the Fishery, Agriculture and Forestry sector.

The selling shareholder (Bain Capital) will generate ¥38.8 billion ($366m) by selling 17.7m Yukiguni Maitake (1378 JP) shares- an overallotment option, if exercised, could increase the IPO by ¥5.8 billion.

Before the IPO price range was announced, we expressed our desire to subscribe to the IPO at a reasonable valuation despite an unconvincing growth story, due to stable revenue and operating cash flows alongside attractive operating margins (13.2% in FY2020), even amidst COVID-19.

Yukiguni Maitake: Stable Maitake Mushroom Business With Limited Growth Opportunities

As the price range was announced at ¥2,000-2,400 per share, we expressed that the company is generously valued and there could be little upside potential for IPO investors.

Yukiguni Maitake IPO Valuation: Bain Capital Is Out and Leaving Little Upside for IPO Investors

In this insight, we take a look at the company’s valuation against the Fishery, Agriculture and Forestry sector peer basket, and discuss implications of Topix inclusion and possible overhang from Bain Capital’s remaining 6.65% ownership share.


TOPIX Inclusion (9279 JP): Gift Inc

By Janaghan Jeyakumar, CFA

TSE Mothers-listed noodle restaurant chain Gift Inc (9279 JP) announced (J-only) on Friday after market close it had received approval to move to TSE1 as of 18th September 2020. 

TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 29th October 2020. 

In this insight, we take a look at the Index Inclusion Parameters and the Fundamentals of the company to evaluate the upside potential of the TOPIX Inclusion Event. 


Before it’s here, it’s on Smartkarma

Japan: Nintendo Co Ltd, Tata Motors Ltd and more

By | Daily Briefs, Japan

In today’s briefing:

  • Nintendo – Catalysts to Support the Stock for the Next Year
  • Morning Views Asia: Softbank Group, Tata Motors Ltd

Nintendo – Catalysts to Support the Stock for the Next Year

By Mio Kato

Positive news flow on Nintendo is increasing. Leaks regarding the new upgraded version of the Switch due next year are increasing and interesting, while the company has also asked suppliers to boost production of the Switch… again. There are also increasing signs of building third party support for the platform. What is pertinent is that this time it appears that third parties are finding some real success on the platform. We think this is underappreciated by the market and enables further upside.


Morning Views Asia: Softbank Group, Tata Motors Ltd

By Charles Macgregor

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.


Before it’s here, it’s on Smartkarma

Japan: Softbank Group and more

By | Daily Briefs, Japan

In today’s briefing:

  • Softbank Wrapping up Arm Sale While Wrestling With Alarmed Investors

Softbank Wrapping up Arm Sale While Wrestling With Alarmed Investors

By Vicki Bryan

Sold! Softbank is said to be closing in on a deal to sell Arm Holdings (ARM LN) to NVIDIA Corp (NVDA US) for more than $40 billion in cash and stock in a deal that could be announced as soon as Monday, according to reports out today by The Wall Street Journal and Financial Times.

This finally may be some good news for Softbank’s investors, shaken by news last week that it had launched a massive options program so large it helped move markets on stocks it just bought.

This was funded with cash Softbank had said it must protect against conditions too risky to allow it to execute promised stock buybacks and debt repayment to repair its damaged balance sheet (read more in Softbank’s Son “Feeling The Force” With Options Funded With Cash It Had Pledged To Protect on 9/8/20).

I warned last week Softbank had deliberately withheld and misrepresented material information about such a dramatic change in strategy direction and risk in its earnings presentation to investors just weeks ago.

On Sunday, Softbank’s top investors went straight to the top to find out why—the answer is troubling, but not surprising.

Read on for Bond Angle commentary.


Before it’s here, it’s on Smartkarma

Japan: Keyence Corp and more

By | Daily Briefs, Japan

In today’s briefing:

  • Keyence (6861 JP): Back to the Future?

Keyence (6861 JP): Back to the Future?

By Scott Foster

We asked Keyence about the impact of COVID-19 on their business. They were not terribly helpful.

  • Management expects market conditions to revert to pre-COVID normal as the economy recovers. They see no material change in their business mix, growth drivers or competition. 
  • Their business in China began to recover in the three months to June. Sales in all other regions were down, although activity has picked up recently with the easing of travel restrictions.
  • As usual, they provided no guidance. 

The share price is sticking near the all-time high reached a month ago. Valuations suggest profit taking is in order. So do economic factors. It took three years for operating profit to recover from the Lehman Shock.


Before it’s here, it’s on Smartkarma

Japan: Softbank Group, Yukiguni Maitake, Koei Tecmo Holdings, Kirindo Holdings, Daikin Industries, Softbank Corp, Hinokiya Holdings, RPA Holdings Inc, Chatwork Co Ltd and more

By | Daily Briefs, Japan

In today’s briefing:

  • Softbank Group – Funding Secured by Masayoshi Musk?
  • The TSE’s Listing Criteria Revisions – Part I
  • Koei Tecmo – The Market Is Sleeping on the Zelda Musou Nintendo Tie-Up for Switch but Shouldn’t
  • Kirindo (3194) – Another Cheap Bain MBO With Weak Adherence to Fair M&A Guidelines
  • 🇯🇵 JAPAN • Daikin (6367 JP) – Perfect Pricing
  • Softbank Corp Placement – Quick Update – Wide Discount from Undisturbed but Don’t Expect Much
  • Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation
  • Small Cap Growth: RPA (6572) – The Digital Workforce
  • Small Cap Growth: Chatwork (4448) – It’s Good to Chat.

Softbank Group – Funding Secured by Masayoshi Musk?

By Mio Kato

The Japanese language Nikkei had an article out yesterday after the close discussing the possibility of a Softbank MBO. Of course, with Softbank you really never know, but to us this smells like an attempt to drive a short squeeze. We discuss why below.


The TSE’s Listing Criteria Revisions – Part I

By Travis Lundy

In late July, the Tokyo Stock Exchange issued Revisions to Listing Rules to Enhance Functions for Raising Funds through the Capital Market. 

The Revisions To The Rules

Document Language
Main Document Source Pages English, Japanese
Presentation English , Japanese
Details English , Japanese
Disclosure related to Business Matters & Growth Potential Preparations (Provisional Version) – MOTHERS-related Japanese

The presentation is the most useful of the documents. 

The presentation starts with something ubiquitously covid-19-related. This covid aspect is, of course, hogwash. 

As the Covid-19 outbreak severely impacts business activities and corporate performance, Tokyo Stock Exchange, Inc. (TSE) recognizes the urgent need to enhance capital market’s functions for companies raising funds in the market, thereby facilitating a swift recovery in the Japanese economy and sustained growth while strengthening the soundness of the market.

This announcement was made with an eye towards the planned equity market restructuring (as previously discussed in insights linked below) in order to re-define listing criteria for each of the three major future sections (A “blue chip” section, a “growth” section, and an “everyone else” section. This was principally RE-announced (because the content is the same as the 21 February announcement) to announce the beginning of the public comment period.

The major revisions are: 

  1. For the First Section (the “blue chip” section): raise minimum market cap, float market cap hurdle, net assets, and profitability hurdle, but lower the minimum number of shareholders, and, relax the criteria for large companies to not get demoted to TSE2 or delisted if the company goes to negative net worth (avoid automatic demotion of Sharp and Toshiba). [note that there are other enhancements in the cash market restructuring designed to garner further approval from international/domestic institutional investors with regard to improvements in governance, etc, for future “blue chip” section companies]
  2. For MOTHERS (the “growth” section): loosen listing criteria (accept even smaller companies with even fewer shareholders. “Improve shareholder confidence through enriching the disclosure system for business plans.”
  3. For TSE2/JASDAQ Standard (the “Everybody Else” section):  standardize listing criteria so that all of the relevant sections have the same criteria (because in the cash market restructuring they will become one), relax TSE criteria to be more like JASDAQ criteria (lower minimum float, lower minimum market cap, lower minimum #shareholders, lower minimum business performance before listing, etc, and then a requirement that JASDAQ-listed stocks adopt the corporate governance code. 

None of these changes are terribly ground-shaking at first glance. And the information was almost completely unchanged from the Overview of the Market Structure Review Outline of the New Market Segments published in February this year. 

  • It will make it possible to have less-liquid stocks all across the spectrum, but all stocks will start to comply with the corporate governance and reporting requirements of the main board.
  • Eventually, with the launch of the restructured market sections, there will be enhanced corporate governance, and there may be a revamped stock index to replace TOPIX, or TOPIX may be re-jigged.
  • Either way I expect that it will not be hugely consequential for years to come. I expect that a new index to replace the equivalent of TOPIX Small will be implemented to allow the transfer of capital into smallcaps – i.e. something akin to a Russell 2000 – which major domestic passive managers will be urged to use with a small allocation to it as they rotate to something like TOPIX Prime which only has large caps.
  • Foreign investors who currently use a large cap universe such as MSCI will not see any good reason to switch to the new TOPIX PRIME Index.
  • Done right, there will be revisions to the index futures, dividend futures, index options, etc products. 
  • Done REALLY right, there will be structured buybacks by companies leaving the indices in phased stages.

But this does create some near-term “issues” for TOPIX and those companies which would try to get in. More discussion below.


Koei Tecmo – The Market Is Sleeping on the Zelda Musou Nintendo Tie-Up for Switch but Shouldn’t

By Mio Kato

Two days ago Nintendo released an announcement about Hyrule Warriors: Age of Calamity (Aka Zelda Musou). This is a tie-up with Koei Tecmo and will be essentially a Zelda skin on KT’s Dynasty Warriors series… except it isn’t. More below.


Kirindo (3194) – Another Cheap Bain MBO With Weak Adherence to Fair M&A Guidelines

By Travis Lundy

At 9pm last night, basically a full day after Kyodo carried a news story that Kirindo Holdings (3194 JP) was going to be taken private by Bain, the company dropped a load of documents onto the TDNet exchange document filing system indicating that indeed Bain would conduct a Tender Offer to privatise the company and delist it. 

I imagine bankers spent all day putting the information together. It’s kind of a complicated document and structure – more so than normal. But at heart, it is an MBO where at the end, Bain Capital will have about 60% of the resultant enterprise, and the Teranishi family will have about 40%. Given that the two familymembers who will 

The founder and current chairman Teranishi Tadayuki (91) does not appear to be selling in the end, but his son Teranishi Toyohiko, the president (63) appears to be the solid leader through the next stage. This appears to be a kind of succession planning construct, not unlike the Nichii Gakkan Co (9792 JP) MBO and several others in the past couple of years.

Succession-planning MBOs are all the rage. There are good reasons for this. I expect this trend to only accelerate from here. 

More below the fold. 


🇯🇵 JAPAN • Daikin (6367 JP) – Perfect Pricing

By Campbell Gunn

Source: Daikin

GLOBAL LEADER – Daikin is one of Japan’s few global enterprises, and the company is rightly proud of its status as the ‘world’s No.1 air-conditioning company’. Based on the company’s FY21 forecast, Japan represents only 23% of sales – over US$6 billion of revenues are to sourced from the Americas, one of the largest exposures of any non-auto company to that region. Daikin has benefited from its sole focus on A/C and a lack, as yet, of a viable Chinese competitor.

In the DETAIL section below,  we shall review Daikin’s financial performance, returns and valuation. We shall not attempt to forecast the prospects for the A/C industry or assess Daikin’s competitive position. Nevertheless, we expect A/C market growth to continue to exceed GDP growth and for Daikin to continue to gain market share globally, including through acquisitions. We expect the company to use the ¥183 billion increase in net debt in the last quarter to expand its global presence further.

PERFECTION – By bidding up Daikin’s shares by 50% in the last six months, the market has looked far beyond COVID-19 and has anticipated much of the company’s incremental medium-term growth. At a current EV/Peak OP of 20.3 times, Daikin has only been as expensive by this metric in 1996 and 2000.


Softbank Corp Placement – Quick Update – Wide Discount from Undisturbed but Don’t Expect Much

By Zhen Zhou, Toh

Softbank Group (9984 JP) (SBG) is looking to raise about US$11bn by selling some of its shares (10%) in Softbank Corp (9434 JP) (SBC). Post sell down, SBG will still hold about 2bn shares (about 42% stake) in SBC.

In this insight, we will look at the deal dynamics, recent performance of the company, and run the deal through our deal framework.

We have previously looked at the May placement, the potential selldown (post announcement selling assets to fund buyback) and its 2018 IPO in:


Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation

By Travis Lundy

The first insight in this event coverage was Yamada Denki Partial TOB For Hinokiya (1413 JP). In that insight I wrote that this was a transaction where the founding family was selling and the company was getting a new sponsor. If the forecasts for this year and the Medium Term Plan are anywhere near accurate, this is a very cheap stock. 

If you can buy it cheap to terms (say 3-4% below terms), because of the structure of the shareholder base and the conditions of the Offer, I expect this will leave one with a very attractive net average breakeven buy price. 

This insight contains the Arb Grids showing breakeven forward price, breakeven PER, breakeven PBR based on market price, pro-ration, and company guidance. 

More detail below. 


Small Cap Growth: RPA (6572) – The Digital Workforce

By Mark Chadwick

  • RPA Holdings Inc (6572 JP) is the Japanese leader in the hottest area of enterprise tech, Robotic Process Automation. 
  • Adoption of RPA in Japan is still low and there is a huge potential addressable market.
  • RPA’s BizRobo platform has hit a growth wobble, but the larger, higher margin Robot Transformation segment is on fire. 
  • The stock trades at an 80% discount to global peers.

Small Cap Growth: Chatwork (4448) – It’s Good to Chat.

By Mark Chadwick

  • Chatwork Co Ltd (4448 JP)  is Japan’s leading business chat app provider with a ¥50bn market capitalization.  

  • With 35% topline growth, the company’s future lies in conquering the SME market and then using that as a platform to launch additional value-added services.  

  • Chatwork dominates within the SME chat market and competes head to head with Slack Technologies Inc (WORK US)  in Japan.  


Before it’s here, it’s on Smartkarma

Japan: oRo Co Ltd, Sony Corp, Workman Co Ltd, Colowide Co Ltd, Mitsubishi Corp, Lion Corp and more

By | Daily Briefs, Japan

In today’s briefing:

  • One “Better” Quality Pick to Consider to Participate in the Future of Japan
  • The Xbox Series S – Minimalism Done Wrong
  • Japan’s Retail Star: Workman Thrives in Crisis
  • 🇯🇵 Japan • Colowide (7616 JP) – A Bite Too Far
  • A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons
  • Japanese Household Goods Pair Trade: Let The Lion Pounce As The Pigeon Lands

One “Better” Quality Pick to Consider to Participate in the Future of Japan

By Steven Chen

  • We view Warren Buffett’s move to invest in Japan’s largest trading companies as being indicative of the lack of reasonably-valued opportunities in the US as well as the size disadvantage of Berkshire Hathaway;
  • While being in no place to judge the superinvestor’s investment decision, we find better investment targets to “participate in the future of Japan,” especially for those who manage a smaller AUM than Berkshire;
  • In this article, we list one superior-quality business that serves the backbone of Japan’s economy (i.e., the SMEs);
  • Our investment strategy concentrates on quality from a business perspective and seeks long-term opportunities with a 10%-15% hurdle rate.

The Xbox Series S – Minimalism Done Wrong

By Mio Kato

So apparently after Sony decided to go with “RGB wireless router stuck on blue” as its design theme,

Microsoft decided to one-up them with a full-retro hybrid radio-iStove.

Xbox Series S     

1940s Tube Radio / Portable iStove

The price of the system was initially leaked and then confirmed as $300 which is aggressive pricing and could help Microsoft… but we view their strategy as flawed and, in some senses, unlucky due to what Sony and Nintendo are doing. We explain why below.


Japan’s Retail Star: Workman Thrives in Crisis

By Michael Causton

It hasn’t been easy selling clothing in the last six months or even in the months before, unless, that is, you are Workman Co Ltd (7564 JP).

The workwear to sports retailer delivered six straight months of sales growth peaking at 44% year-on-year thanks to low price cost performance, relentless expansion of private brands and investment in new franchisees.

Workman’s share price is up more than 3x since we first recommended the retailer in late 2018 but we have been fans of the company for more than a decade for its disciplined focus on low-cost operations, merchandise quality and efforts to understand and produce for its core customer target.

It also helps that Workman is a franchise operation and one that, like Benetton and McDonald’s and other successful franchises over time, buys the land its franchisees operate stores on. The franchise deal keeps costs way lower than competitors and also means personnel costs are for the most part variable while its competitors face fixed staff costs – a huge advantage especially now.

These are core qualities for a retailer and in all aspects, Workman continues to improve. Sales have risen as much as 44% a month since March and as explained below, there are very strong reasons to expect both sales and profit margins to grow much, much further. The share price may have dipped in recent days but the fundamentals remain strong: more growth is to come.


🇯🇵 Japan • Colowide (7616 JP) – A Bite Too Far

By Campbell Gunn

Source for all charts: Japan Analytics

LISTED RESTAURANTS – Japan currently has 102 listed restaurant companies with an aggregate market value of ¥4.9 trillion, representing 2.6% of all listed companies and 0.9% of total market value. Only thirteen companies are capitalised at over ¥100 billion, and forty-one have a market value of less than ¥10 billion. The Sector is ripe for consolidation and COVID-19 should provide a catalyst for an acceleration of the process.  Both create restaurants (3387 JP), and Colowide (7616 JP) have positioned themselves as consolidators, but have become highly leveraged in the process.

Also, the Sector is highly fragmented and segmented by type of food and concept. Only nineteen companies can be deemed ‘diversified’. Furthermore, there are only five listed take-out/delivery specialists, of which Ride On Express (6082 JP) has been the best performer. Overall, the Sector has declined by 3.6% over one year and by 3.2% over three months – a third quartile performance. Colowide’s 31% rise over the last month has pushed the Sector into fourth place amongst our thirty market Sectors, fueled by the apparent success of the tender offer for OOTOYA (2705 JP).

YUTAI KEN One important consideration for investors to note is the widespread practice of offering kabunushi yutai-ken. In addition to dividends, shareholders are sent coupons that can be redeemed at most of the company’s restaurants. Many specialist publications review such programs and offer stock recommendations based on the yutai-yield. As a result, restaurant companies in Japan have some of the highest shareholder counts among listed companies. As coupon-customers normally top-up their spending, this practice helps provide a basic level of cash flow but is a costly exercise to administer. However, there is the added benefit of limiting the number of shares for shorting.

100,000+ CLUBYoshinoya (9861 JP), Atom (7412 JP), Zensho (7550 JP), Kappa Create (7421 JP), Komeda (3543 JP), and create (3387 JP) are all in the top-fifty listed companies ranked by the number of shareholders. All exceed 100,000 shareholders –  beef-bowl chain Yoshiniya has 308,265 exceeding Mitsui (8031 JP) which has twenty-four times the capitalisation.

In this DETAIL below, we shall review Colowide’s long-term performance, returns and valuation and offer a view on the prospects for further consolidation. The Colowide group currently comprises of two listed chains – Kappa Create (7421 JP) and Atom (7412 JP) and the franchise chain Reins International which also operates in Asia and the US.


A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons

By Mio Kato

Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the Japanese market overall offers value investors rich pickings relative to valuations that had been getting more stretched by the day in other regions, especially the US. Below, we provide a quick synopsis of the trading companies’ business models and our thoughts on other potential investments that could attract Berkshire.


Japanese Household Goods Pair Trade: Let The Lion Pounce As The Pigeon Lands

By Oshadhi Kumarasiri

Unicharm Corp (8113 JP), Pigeon Corp (7956 JP) and Lion Corp (4912 JP) are three closely related companies in the Japanese household products market. Although their core competencies are somewhat different, all three of them specialises in health and hygiene related household products.

The correlation of the share price movement of these three companies over the years were very tight. However, Pigeon’s and Lion’s share prices have moved in opposite directions for some time since 30th July 2020, which is contrary to the directions of the guidance revisions during that time.

This divergence in share price performance has created an opportunity for a long short pair trade between Lion and Pigeon. We discuss the details below.


Before it’s here, it’s on Smartkarma

Japan: Asahi Group Holdings, Hinokiya Holdings, Nexon, Double Standard Inc, Softbank Group, Medpeer Inc and more

By | Daily Briefs, Japan

In today’s briefing:

  • 🇯🇵 Japan • Asahi Group Holdings (2502 JP) – A Return & Valuation Perspective
  • Yamada Denki Partial TOB For Hinokiya (1413 JP)
  • Nexon (3659.T): Unfolding Opportunities in the Mobile Games Market
  • Double Standard: SBI Financial Services Alliance and Aster Stake Increase Revive Growth
  • Softbank’s Son “Feeling The Force” With Options Funded With Cash It Had Pledged To Protect
  • TOPIX Inclusion (6095 JP): MedPeer Inc

🇯🇵 Japan • Asahi Group Holdings (2502 JP) – A Return & Valuation Perspective

By Campbell Gunn

Source for all charts: Japan Analytics

Asahi Group Holdings (2502 JP)– Following AGH’s successful share placement to finance the CUB acquisition, this Insight provides new and long-suffering shareholders with an evaluation of the company’s performance and valuation. Where relevant, we shall compare AGH with its domestic rival Kirin Holdings (2503 JP).  The thirty-year correlation between the two company’s share prices is 0.89.


Yamada Denki Partial TOB For Hinokiya (1413 JP)

By Travis Lundy

Japan’s largest electronics retailer, well-known for running large and shiny stores with more aisle space than the more aggressive electronics retailers like Bic and Yodobashi in urban areas, has agreed to buy 45.6-50.1% of Tokyo-based custom homebuilder Hinokiya Holdings (1413 JP) from the founder and his relatives in a Partial Tender Offer at ¥2,000/share which is ~12% premium to last. 

This is really a two-party transaction. Buyer and Seller. The company and its minority shareholders are effectively bystanders but the company will have a cooperative relationship with Yamada Denki. Yamada Denki will then own and most likely consolidate the company. At ¥2,000/share it is not an expensive purchase and given the breadth of Yamada Denki’s coverage, there may actually be some interesting follow-on effects. 

This is an interesting situation for long-only investors and arbitrageurs for reasons wholly unlike normal partial tender situations. More below the fold. 


Nexon (3659.T): Unfolding Opportunities in the Mobile Games Market

By Julie Lee

Games are now one of the best entertainment channels for many consumers. The global games market is estimated to grow faster than GDP growth for next few years (8.3% CAGR for 2014-2019), backed by its accessibility, affordability and interesting features from new technologies. Furthermore, the growth rate has been increased due to COVID this year.

Global per capita game spend and China per capita game spend were still only $24.2 per year and $23 per year respectively, as of 2018. Korea had the highest per capita spend of $227 and game spend in other countries, especially China, is expected to catch up given development of devices and IT networks, and increase in disposable income. 

Nexon is one of the largest game developers in Asia. In 2020, it has begun tapping into the huge opportunities of the mobile games market. When other games companies introduced mobile versions utilizing their PC IPs, the mobile versions were able to achieve 2~10x revenues compared to their PC versions.

Nexon’s share price has declined by 13% from the peak, since it had delayed the launch of a key mobile game (“DNF mobile”) on 11th August. The street is expecting it to resume its launch sometime in September. There is a risk that its launch could be further delayed. However, Nexon can still grow its operating profit by 24% CAGR over 2019-2021E without “DNF mobile” and its valuation is not expensive. If “DNF mobile” is successfully launched in September, its operating profit is estimated to grow by 47% CAGR over 2019-2021E. 

Any further correction due to the concern over “DNF mobile” could provide a good buying opportunity for a long term investment in the fast growing entertainment company at attractive valuation.  


Double Standard: SBI Financial Services Alliance and Aster Stake Increase Revive Growth

By Shifara Samsudeen, ACMA, CGMA

Double Standard provides web marketing support services and content data by utilising big data for enterprises. The company operates under two main business segments, Big Data related business and Service Planning Development business. The company was founded in 2012 and listed its shares in 2015 through an initial public offering.

The company’s revenues have grown at double-digit rates over the past 4-5 years; however, we have observed that the company’s margins have declined over the past 4-5 quarters.

The company has entered into a business alliance with SBI Financial Services in December 2019 and at the same time, it also has increased its stake in one of its equity-affiliates, Aster’s. We expect these strategic moves to help boost the company’s top line and revive its deteriorating margins.

In this insight, we take a look at the company’s business, financials and valuation.


Softbank’s Son “Feeling The Force” With Options Funded With Cash It Had Pledged To Protect

By Vicki Bryan

Softbank Group (9984 JP) was revealed on Friday as the massive NASDAQ whale helping to drive unprecedented option volume in recent weeks with its multi-billion dollar call-buying spree in the biggest tech names, as reported by Financial Times and The Wall Street Journal which confirmed speculation Thursday by Zero Hedge.

Softbank’s option trades added to $40 billion in call-buying over the past month traced to retail investors. The resulting frenzy netted Softbank $4 billion in option trading gains—on paper—on its own $50 billion notional exposure.

By comparison, Softbank’s newly acquired long positions in Amazon.com Inc (AMZN US), Alphabet Inc Cl C (GOOG US), Microsoft Corp (MSFT US),  and Tesla Motors (TSLA US) are worth just $2 billion, almost all that’s left of the $10 billion Softbank spent late in the June quarter buying and selling mostly tech stocks at heady prices. Those holdings now are also subject to sharp declines triggered when Softbank’s option scheme was revealed. Sure enough, Softbank lost $9 billion in market value on Monday.

There’s plenty of intense scrutiny underway to understand these trades and what their impact ultimately proves to be. I’m more interested in Softbank’s drastic change in strategy and its alternative deployment of cash from $40 billion raised in stock fire sales forced by its wary banks and legacy mega-investors who cut him and Softbank off after decades of seemingly endless billions in available funding when his recklessness netted Softbank and Vision Fund tens of billions of dollars in record losses. 

This certainly is not what Softbank told investors to expect mere weeks ago.

Instead, Softbank’s actions signal arrogance, or desperation, or worse—that CEO Masayoshi Son feels unrestrained and back in his Star Wars Zone with $40 billion in fresh cash.

Read on for a Bond Angle deep dive into the belly of Softbank, The Whale, and what Son feels free to do with its $40 billion in cash that was pledged to bolster Softbank’s bloodied balance sheet.


TOPIX Inclusion (6095 JP): MedPeer Inc

By Janaghan Jeyakumar, CFA

TSE Mothers-listed Medpeer Inc (6095 JP) announced (J-only) after market close today it had received approval to move to TSE1 as of 15th September 2020. 

TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 29th October 2020. 

MedPeer is a health-tech company that mainly operates a “doctors-only” social-media platform that enables online knowledge sharing between doctors. This “collective medical intelligence” is then used to provide marketing solutions for pharmaceutical companies and medical device manufacturers. They also provide virtual healthcare solutions to online medical consultation and dietary coaching services. 

In this insight, we take a look at the Index Inclusion Parameters and the Fundamentals of the company to evaluate the upside potential of the TOPIX Inclusion Event and the trade on the follow.


Before it’s here, it’s on Smartkarma