In this briefing:
- Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment
- Japan – Jump in Shorts Led By Fast Retailing (9983 JP)
- Japan Prime Realty Placement – A Straightforward and Accretive Acquisition
- Recruit Holdings 3Q Update: Risks Have Started to Materialise
- The Guerrilla War Against The PBOC
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.
Sectorally, short positions were increased in Consumer Discretionary (US$502m) and Financials (US$44m) while shorts were covered in Communication Services (US$84m), Health Care (US$41m) and Real Estate (US$26m).
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:
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.
- 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 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.