Japan

In this briefing:

1. Toshiba Machine – How Much Is It Worth?

1. Toshiba Machine – How Much Is It Worth?

With the news over the weekend regarding Murakami being set to launch a tender offer for Toshiba Machine shares, we spoke to the company briefly to confirm the accounting treatment of its balance sheet assets. We present our thoughts on the potential value of the company below.

In this briefing:

1. 🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores
2. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment
3. Japan – Jump in Shorts Led By Fast Retailing (9983 JP)
4. Japan Prime Realty Placement – A Straightforward and Accretive Acquisition
5. Recruit Holdings 3Q Update: Risks Have Started to Materialise

1. 🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

THREE-YEAR LOW – With Bridgestone (5108 JP)‘s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore – the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19’s impact will likely see the 2016 ‘playbook’ repeated next quarter with a lower Results Score and a ‘sideways’ Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. 

LEADING INDICATOR – By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office’s Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. 

SCORING METHODOLOGY – For those new to these Insights, we briefly recap our scoring methodology below:-

• Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.

• The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.

• The combined Results & Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.

• All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.

  ---

  • SECTOR SCORES •

  

  Source • Japan Analytics

  In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter’s ‘winners’ and ‘losers’. The chart above shows a  seventeen-year ‘timeline’ of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to ‘bottom’ this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical ‘champion’. 

2. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment

Japan Airport Terminal’s operating position is interesting. The company has been making significant investments to expand its capacity for international flights, partly due to the upcoming Tokyo Olympics and thus has seen capex surge from a low of ¥4.8bn in FY03/15 to an expected ¥77bn this FY. This is likely to lead a significant surge in depreciation together with the potential for a significant increase in operating profit… if strong demand continues. Ultimately, this is the story that the coronavirus outbreak threatens, and we are concerned that the depreciation burden may be being underestimated by the market.

3. Japan – Jump in Shorts Led By Fast Retailing (9983 JP)

4. Japan Prime Realty Placement – A Straightforward and Accretive Acquisition

Japan Prime Realty Investment (8955 JP) is looking to raise about US$150m in its placement to acquire a property.

We have earlier covered two of the REIT’s 2015 and 2017 offering in:

• Japan Prime Realty – Decent Property, Strong Track Record 
• Take the deal owing to its track record and reasonable relative valuations

Overall, the deal scores well on our framework on all factors except for valuation, which indicated that JPR is trading largely in line with peers. 

5. Recruit Holdings 3Q Update: Risks Have Started to Materialise

• Recruit Holdings (6098 JP)’s 3Q FY03/20 results show early signs of the risks that we highlighted in our previous notes materialising. In our note, Global Labour Markets Are Starting to Slow Down – Time To “Lay Off” Recruit, we suggested that Recruit’s exposure to the Japanese and global labour markets is 84% and 71% of its consolidated revenue and EBITDA, hence, with global labour markets starting to slow down, and hiring stalls, Recruit’s growth could be hampered in the medium term. Recruit’s Staffing and HR Solutions revenue decreased by 3.3% YoY and 2.8% YoY respectively in FY03/20 (cf. +1.9% YoY and +7.7% YoY respectively in FY03/19). 

• In our note, Recruit Holdings [Alternative Data]: Should the Slowdown in Indeed Warrant a Discount?, we suggested that revenue growth of the HR Technology segment, which operates indeed.com (Indeed) and glassdoor.com (Glassdoor), would fall below 30% YoY (22%-28% YoY) for the first time in 3Q FY03/20. HR Technology segment revenue increased by c.28% in 3Q FY03/20. We believe most of this growth is due to better monetisation efforts at Glassdoor which could be maxing out soon, hence, HR Technology revenue growth is likely to be even lower over the next few quarters. 

• We didn’t find anything exciting to look forward to on the long side from Recruit’s 3Q FY03/20 results. We believe that the market would start discounting Recruit over the next few quarters as risks (that we have highlighted above) would become more obvious. Thus, with its valuation also at an all-time high, we believe it is a good time to short Recruit. 

In this briefing:

1. Nippon Prologis REIT Placement: DPU Accretive Despite Lower NOI Yield than past Deals

1. Nippon Prologis REIT Placement: DPU Accretive Despite Lower NOI Yield than past Deals

Nippon Prologis Reit (3283 JP) announced a placement to raise up to USD 277 million, together with its financial results for the 14th fiscal period. We have previously covered NPR’s placements in:

• Nippon Prologis REIT Placement – About Time for a Placement  in June 2019

In this briefing:

1. Nippon Prologis REIT Placement: DPU Accretive Despite Lower NOI Yield than past Deals
2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

1. Nippon Prologis REIT Placement: DPU Accretive Despite Lower NOI Yield than past Deals

Nippon Prologis Reit (3283 JP) announced a placement to raise up to USD 277 million, together with its financial results for the 14th fiscal period. We have previously covered NPR’s placements in:

• Nippon Prologis REIT Placement – About Time for a Placement  in June 2019

2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

In this briefing:

1. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment
2. Japan – Jump in Shorts Led By Fast Retailing (9983 JP)
3. Japan Prime Realty Placement – A Straightforward and Accretive Acquisition
4. Recruit Holdings 3Q Update: Risks Have Started to Materialise
5. The Guerrilla War Against The PBOC

1. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment

Japan Airport Terminal’s operating position is interesting. The company has been making significant investments to expand its capacity for international flights, partly due to the upcoming Tokyo Olympics and thus has seen capex surge from a low of ¥4.8bn in FY03/15 to an expected ¥77bn this FY. This is likely to lead a significant surge in depreciation together with the potential for a significant increase in operating profit… if strong demand continues. Ultimately, this is the story that the coronavirus outbreak threatens, and we are concerned that the depreciation burden may be being underestimated by the market.

2. Japan – Jump in Shorts Led By Fast Retailing (9983 JP)

3. Japan Prime Realty Placement – A Straightforward and Accretive Acquisition

Japan Prime Realty Investment (8955 JP) is looking to raise about US$150m in its placement to acquire a property.

We have earlier covered two of the REIT’s 2015 and 2017 offering in:

• Japan Prime Realty – Decent Property, Strong Track Record 
• Take the deal owing to its track record and reasonable relative valuations

Overall, the deal scores well on our framework on all factors except for valuation, which indicated that JPR is trading largely in line with peers. 

4. Recruit Holdings 3Q Update: Risks Have Started to Materialise

• Recruit Holdings (6098 JP)’s 3Q FY03/20 results show early signs of the risks that we highlighted in our previous notes materialising. In our note, Global Labour Markets Are Starting to Slow Down – Time To “Lay Off” Recruit, we suggested that Recruit’s exposure to the Japanese and global labour markets is 84% and 71% of its consolidated revenue and EBITDA, hence, with global labour markets starting to slow down, and hiring stalls, Recruit’s growth could be hampered in the medium term. Recruit’s Staffing and HR Solutions revenue decreased by 3.3% YoY and 2.8% YoY respectively in FY03/20 (cf. +1.9% YoY and +7.7% YoY respectively in FY03/19). 

• In our note, Recruit Holdings [Alternative Data]: Should the Slowdown in Indeed Warrant a Discount?, we suggested that revenue growth of the HR Technology segment, which operates indeed.com (Indeed) and glassdoor.com (Glassdoor), would fall below 30% YoY (22%-28% YoY) for the first time in 3Q FY03/20. HR Technology segment revenue increased by c.28% in 3Q FY03/20. We believe most of this growth is due to better monetisation efforts at Glassdoor which could be maxing out soon, hence, HR Technology revenue growth is likely to be even lower over the next few quarters. 

• We didn’t find anything exciting to look forward to on the long side from Recruit’s 3Q FY03/20 results. We believe that the market would start discounting Recruit over the next few quarters as risks (that we have highlighted above) would become more obvious. Thus, with its valuation also at an all-time high, we believe it is a good time to short Recruit. 

5. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

In this briefing:

1. Nippon Prologis REIT Placement: DPU Accretive Despite Lower NOI Yield than past Deals
2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions
3. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

1. Nippon Prologis REIT Placement: DPU Accretive Despite Lower NOI Yield than past Deals

Nippon Prologis Reit (3283 JP) announced a placement to raise up to USD 277 million, together with its financial results for the 14th fiscal period. We have previously covered NPR’s placements in:

• Nippon Prologis REIT Placement – About Time for a Placement  in June 2019

2. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

3. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

• • As youth vaping became a trend and the term “Juuling” became a part of American high school life, Juul became the most popular e-cigarette in the US with over 70% market share.
  • JUUL Labs, the producer of Juul, is an American e-cigarette company with over $2.0bn in revenue.
  • The success of Juul in the e-cigaratte market even attracted the interest of Altria, who sells Marlboro and many other cigarette brands in the US.
  • Altria acquired a 35% stake in Juul Labs for $12.8bn on December 20, 2018, giving Juul Labs a valuation of more than $36.0bn
  • Juul Labs and Altria’s honeymoon was over even before it started as adults, health and safety organisations and politicians became increasingly concerned about the “Juuling” epidemic within teenagers in the US.
  • According to the company, Juul is about giving adult smokers a less harmful alternative to cigarettes. It also insists that it never marketed or knowingly sold its trendy e-cigarettes and flavoured nicotine pods to teenagers. But in reality, Juul was never about helping the adult smokers as it turned a blind eye as to who is purchasing its e-cigarettes and nicotine pods.
  • Since Juul Labs ignored the fact that Juul and teenage vaping has become an epidemic, its success was short lived. The company is now buried under a mountain of investigations, subpoenas and lawsuits.
  • Towards the end of last year, Juul announced that it will cut 650 jobs, freeze hiring and stop broadcast, print and digital advertising for its products. These initiatives are expected to save around $1.0bn of costs in 2020.
  • Under these circumstances, Juul’s valuation was cut 35% by Altria and certain unidentified sources suggest that Juul itself has decreased the valuation to $24.0bn. The initial investors such as Tiger Global and Fidelity Investments have also decreased their valuations of the company by more than 50%. ($19.0bn and $16.4bn respectively).
  • Now, Juul is kept on a short leash by the US regulatory bodies and as a result it had to suspend sales of its non-tobacco, non-menthol-based flavours in the US.
  • Amidst these bans, Juul was pushing to enter new markets in Europe, the Middle East, Africa, South America and Asia.
  • However, it was reported last week that Juul was pulling back from overseas expansion and we believe Juul’s troubles in the US market plays into the hands of other vaping brands such as Japan Tobacco’s Logic and Ploom.

In this briefing:

1. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions
2. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

1. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

2. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

• • As youth vaping became a trend and the term “Juuling” became a part of American high school life, Juul became the most popular e-cigarette in the US with over 70% market share.
  • JUUL Labs, the producer of Juul, is an American e-cigarette company with over $2.0bn in revenue.
  • The success of Juul in the e-cigaratte market even attracted the interest of Altria, who sells Marlboro and many other cigarette brands in the US.
  • Altria acquired a 35% stake in Juul Labs for $12.8bn on December 20, 2018, giving Juul Labs a valuation of more than $36.0bn
  • Juul Labs and Altria’s honeymoon was over even before it started as adults, health and safety organisations and politicians became increasingly concerned about the “Juuling” epidemic within teenagers in the US.
  • According to the company, Juul is about giving adult smokers a less harmful alternative to cigarettes. It also insists that it never marketed or knowingly sold its trendy e-cigarettes and flavoured nicotine pods to teenagers. But in reality, Juul was never about helping the adult smokers as it turned a blind eye as to who is purchasing its e-cigarettes and nicotine pods.
  • Since Juul Labs ignored the fact that Juul and teenage vaping has become an epidemic, its success was short lived. The company is now buried under a mountain of investigations, subpoenas and lawsuits.
  • Towards the end of last year, Juul announced that it will cut 650 jobs, freeze hiring and stop broadcast, print and digital advertising for its products. These initiatives are expected to save around $1.0bn of costs in 2020.
  • Under these circumstances, Juul’s valuation was cut 35% by Altria and certain unidentified sources suggest that Juul itself has decreased the valuation to $24.0bn. The initial investors such as Tiger Global and Fidelity Investments have also decreased their valuations of the company by more than 50%. ($19.0bn and $16.4bn respectively).
  • Now, Juul is kept on a short leash by the US regulatory bodies and as a result it had to suspend sales of its non-tobacco, non-menthol-based flavours in the US.
  • Amidst these bans, Juul was pushing to enter new markets in Europe, the Middle East, Africa, South America and Asia.
  • However, it was reported last week that Juul was pulling back from overseas expansion and we believe Juul’s troubles in the US market plays into the hands of other vaping brands such as Japan Tobacco’s Logic and Ploom.

In this briefing:

1. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions
2. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival
3. Mitsubishi UFJ Financial – Stellar Results at Morgan Stanley Modestly Offsetting Bank Danamon Hiccup

1. EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions

The highlights for December are as follows:

• Panasonic:

• • The labour shortage at the Nevada plant is said to be under control. Thus, delays in supply do not seem to be a concern.
  • A partnership with Tropos should strengthen the software side of Panasonic’s business. Motors. Panasonic’s software platform, OneConnect, to be used in Tropos manufactured EVs designed for use in last-mile applications and emergency.
  • Efforts by the company to improve its battery business and adopt CASE related technologies (as highlighted in our previous monthlies) are likely to bring in growth only over the medium term. For the upcoming quarter, consensus and our estimates are for a decline in revenue and OP given the unfavourable market conditions and struggle in battery business through last year.

• There will be no further cut in subsidy in China for NEVs. With the subsidy staying intact, demand for NEVs is likely to improve (or at least not decline further) suggesting better market conditions for battery players globally (who invested in China despite the country’s slowdown last year).
• CATL was quiet last month, although there was news about the company being a possible buyer of the US luxury car brand-Aston Martin. This seems more likely to be merely a rumour and we feel that CATL does not seem to have strong synergies to do so.
• South Korean players had no major battery highlights last month.
• CATL’s share price continued to rise last month, followed by Panasonic, both outperforming the market. The Korean players and BYD continued to see relatively weak performance during the month.

2. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

• • As youth vaping became a trend and the term “Juuling” became a part of American high school life, Juul became the most popular e-cigarette in the US with over 70% market share.
  • JUUL Labs, the producer of Juul, is an American e-cigarette company with over $2.0bn in revenue.
  • The success of Juul in the e-cigaratte market even attracted the interest of Altria, who sells Marlboro and many other cigarette brands in the US.
  • Altria acquired a 35% stake in Juul Labs for $12.8bn on December 20, 2018, giving Juul Labs a valuation of more than $36.0bn
  • Juul Labs and Altria’s honeymoon was over even before it started as adults, health and safety organisations and politicians became increasingly concerned about the “Juuling” epidemic within teenagers in the US.
  • According to the company, Juul is about giving adult smokers a less harmful alternative to cigarettes. It also insists that it never marketed or knowingly sold its trendy e-cigarettes and flavoured nicotine pods to teenagers. But in reality, Juul was never about helping the adult smokers as it turned a blind eye as to who is purchasing its e-cigarettes and nicotine pods.
  • Since Juul Labs ignored the fact that Juul and teenage vaping has become an epidemic, its success was short lived. The company is now buried under a mountain of investigations, subpoenas and lawsuits.
  • Towards the end of last year, Juul announced that it will cut 650 jobs, freeze hiring and stop broadcast, print and digital advertising for its products. These initiatives are expected to save around $1.0bn of costs in 2020.
  • Under these circumstances, Juul’s valuation was cut 35% by Altria and certain unidentified sources suggest that Juul itself has decreased the valuation to $24.0bn. The initial investors such as Tiger Global and Fidelity Investments have also decreased their valuations of the company by more than 50%. ($19.0bn and $16.4bn respectively).
  • Now, Juul is kept on a short leash by the US regulatory bodies and as a result it had to suspend sales of its non-tobacco, non-menthol-based flavours in the US.
  • Amidst these bans, Juul was pushing to enter new markets in Europe, the Middle East, Africa, South America and Asia.
  • However, it was reported last week that Juul was pulling back from overseas expansion and we believe Juul’s troubles in the US market plays into the hands of other vaping brands such as Japan Tobacco’s Logic and Ploom.

3. Mitsubishi UFJ Financial – Stellar Results at Morgan Stanley Modestly Offsetting Bank Danamon Hiccup

• Morgan Stanley’s (MS.US) 4Q19 results imply a strong solid ¥ 54 bn contribution to Mitsubishi UFJ Financial Group’s (8306.JP) [MUFG] FY 2019 consolidated results. In aggregate, this implies a FY 2019 total of ¥ 296 bn attributed to MS. 
• MUFG will include its 24% share of MS a quarter in arrears as part of its Q4 FY3/20 (Jan-Mar 2020) equity in earnings of affiliates. 
• US investment banks are well positioned from a capital perspective with ongoing share buybacks and dividends. 

In this briefing:

1. Japan – Jump in Shorts Led By Fast Retailing (9983 JP)
2. Japan Prime Realty Placement – A Straightforward and Accretive Acquisition
3. Recruit Holdings 3Q Update: Risks Have Started to Materialise
4. The Guerrilla War Against The PBOC
5. The US and Developed Countries: Bump in the Road or Cliff Edge?

1. Japan – Jump in Shorts Led By Fast Retailing (9983 JP)

2. Japan Prime Realty Placement – A Straightforward and Accretive Acquisition

Japan Prime Realty Investment (8955 JP) is looking to raise about US$150m in its placement to acquire a property.

We have earlier covered two of the REIT’s 2015 and 2017 offering in:

• Japan Prime Realty – Decent Property, Strong Track Record 
• Take the deal owing to its track record and reasonable relative valuations

Overall, the deal scores well on our framework on all factors except for valuation, which indicated that JPR is trading largely in line with peers. 

3. Recruit Holdings 3Q Update: Risks Have Started to Materialise

• Recruit Holdings (6098 JP)’s 3Q FY03/20 results show early signs of the risks that we highlighted in our previous notes materialising. In our note, Global Labour Markets Are Starting to Slow Down – Time To “Lay Off” Recruit, we suggested that Recruit’s exposure to the Japanese and global labour markets is 84% and 71% of its consolidated revenue and EBITDA, hence, with global labour markets starting to slow down, and hiring stalls, Recruit’s growth could be hampered in the medium term. Recruit’s Staffing and HR Solutions revenue decreased by 3.3% YoY and 2.8% YoY respectively in FY03/20 (cf. +1.9% YoY and +7.7% YoY respectively in FY03/19). 

• In our note, Recruit Holdings [Alternative Data]: Should the Slowdown in Indeed Warrant a Discount?, we suggested that revenue growth of the HR Technology segment, which operates indeed.com (Indeed) and glassdoor.com (Glassdoor), would fall below 30% YoY (22%-28% YoY) for the first time in 3Q FY03/20. HR Technology segment revenue increased by c.28% in 3Q FY03/20. We believe most of this growth is due to better monetisation efforts at Glassdoor which could be maxing out soon, hence, HR Technology revenue growth is likely to be even lower over the next few quarters. 

• We didn’t find anything exciting to look forward to on the long side from Recruit’s 3Q FY03/20 results. We believe that the market would start discounting Recruit over the next few quarters as risks (that we have highlighted above) would become more obvious. Thus, with its valuation also at an all-time high, we believe it is a good time to short Recruit. 

4. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

5. The US and Developed Countries: Bump in the Road or Cliff Edge?

We are in the camp that believes the US economy will hit a recessionary speed-bump in 2020. This isn’t because of the coronavirus fallout but because of signals that emerged through 2019. Over the years we have relied on a series of indicators which have a good track record in forecasting US downturns, regardless of elections or public health.

In this briefing:

1. 🇯🇵 JAPAN • IT’S A WRAP! Part 1 – 2020-Q1 Earnings Results & Forecasts
2. 🇯🇵 JAPAN • Results & Revisions Daily Roundup – 14th February ▲2212 4927 8358 ▼ 6502 6098 9435
3. Factories Outside of China Now Halting Production as Virus Impact Expands
4. Odelic MBO – STILL The Wrong Takeover Price, It’s a Good Long Here
5. Last Week in Event SPACE: Bank Permata, China Agri, Ayala, GMO, NTT, Tokyo Broadcasting

1. 🇯🇵 JAPAN • IT’S A WRAP! Part 1 – 2020-Q1 Earnings Results & Forecasts

A YEAR TO FORGET – The aggregate earnings of Japanese listed companies peaked on December 26th 2018 and, over the last five quarters, have declined by ¥10.5 trillion or by 22%. Net margins have declined by 135 basis points over this period to 4.5%, 224 bps below the current operating margin. Whatever the uncertainties over the impact of Covid-19, the current quarter will see a further decline. A base-case outlook for aggregate Net Income is ¥30 trillion by May 2020, which, if the total market cap were to remain at current levels, would take the  PE to a ten-year high of 22.4 times. The decline in Operating Income has been more moderate at 11%, illustrating the still all-too-frequent write-offs that Japanse corporate routinely require as penance for their mostly-overseas capital misallocations.

ACCELERATING DOWNTREND –  Trailing-twelve-month (TTM) Revenues are now declining quarter-on-quarter, and the pace of decline in Operating Income has accelerated for the fourth quarter in a row. The aggregate one year forward forecasts have seen falling QoQ revenues and OP since TTM-2. With only one month to go before the end of FY2020 for the majority of companies and with many December year-end companies looking forward ten months, a degree of optimism has slowed the pace of decline in the current quarter. We expect Covid-19 to result in many of these forecasts to be revised down at the interim results to be released in August. 

RECESSION – With GDP shrinking by an annualised 6.3% in the fourth quarter and Covid-19 having at least a similar impact in the current quarter, Japan will be in an, albeit ‘technical’, recession by the spring.

2. 🇯🇵 JAPAN • Results & Revisions Daily Roundup – 14th February ▲2212 4927 8358 ▼ 6502 6098 9435

14TH FEBRUARY ROUNDUP – With apologies to Trend Micro (4704 JP) and Bridgestone (5108 JP) who have yet to report, this will be our last daily roundup for this ‘season’. After an additional 398 results and 253 forecasts/revision announcements, our Results Score dropped by a further eight basis points to -0.84, a decline of 190 basis points since the beginning of the year. The Forecast/Revision Score added three bps to reach 0.70, forty basis point higher than at the end of December. The last time that the Forecast/Revision Score was more than 150 bps higher than the Results Score was in the first calendar quarter of 2016 and preceded a sharp market upturn. The current market value is, however, ¥160 trillion higher than at that point, assisted by the constant market intervention by the Bank of Japan. Covid-19’s impact will see the 2016 playbook repeated next quarter with a lower Results Score and a ‘sideways’ Forecast/Results Score. We are less optimistic that the market will repeat the 14% rise seen in 2016-Q2. The cycle low point will be reached with the mostly-interim results to be released in six months. 

3. Factories Outside of China Now Halting Production as Virus Impact Expands

As a follow up to our note Evidence of Global Slowdown Accumulates as Stores Remain Closed and Supply Chains Are Crippled, reports that business impacts have increased are starting to take a more regional or even global flavor.

Despite some factories in China resuming operation on 10th February, several regions have extended shutdowns and labor supply remains restricted due to quarantines. This has caused many factories to delay resuming operations with the few facilities that have resumed operations remaining severely under capacity. We are now seeing a follow-on impact with reports of non-China based factories reporting production halts.

4. Odelic MBO – STILL The Wrong Takeover Price, It’s a Good Long Here

The update to the original insight Odelic MBO Going Too Cheaply – Vaguely Kosaido-Ish is prompted by a few different things. 

1. There was an EDINET filing on 4 Feb showing that Masato Ito had increased its stake. I explain below.
2. I outlined the shareholder structure in some detail in the original insight, but I think more detail is informative.
3. The company announced its Q3 results on 14 Feb, and the balance sheet changed slightly.
4. In talking about the valuation with a Smartkarma client Friday, I discovered something in the long-term assets which makes this deal even more wrongly-priced. And in the Q3 results, the company proved why.

This MBO is STILL going at the wrong price. And it is a bit wronger than I previously thought.

More discussion below.

5. Last Week in Event SPACE: Bank Permata, China Agri, Ayala, GMO, NTT, Tokyo Broadcasting

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events – or SPACE – in the past week)