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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 (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.
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.
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.
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.
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.
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.
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 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:
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]
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.”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.