Category

Japan

Brief Japan: Vietnam’s Big Investment Secret: Foreign Inflows Surge and more

By | Daily Briefs, Japan

In this briefing:

  1. Vietnam’s Big Investment Secret: Foreign Inflows Surge
  2. Renault/Nissan:  Mangalore Alert!
  3. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

1. Vietnam’s Big Investment Secret: Foreign Inflows Surge

Smartk2

  • March saw another strong month of cross-border capital inflows into Vietnam financial assets
  • Underlying flow index shows strong momentum hits value 76.9 (range 0-100)
  • Vietnam flows are moving with similar cross-border flow cycle as China and Asian EM

2. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

3. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: Vietnam’s Big Investment Secret: Foreign Inflows Surge and more

By | Daily Briefs, Japan

In this briefing:

  1. Vietnam’s Big Investment Secret: Foreign Inflows Surge
  2. Renault/Nissan:  Mangalore Alert!
  3. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue
  4. 6857 🇯🇵 Advantest • Scoring & Valuation Update

1. Vietnam’s Big Investment Secret: Foreign Inflows Surge

Smartk2

  • March saw another strong month of cross-border capital inflows into Vietnam financial assets
  • Underlying flow index shows strong momentum hits value 76.9 (range 0-100)
  • Vietnam flows are moving with similar cross-border flow cycle as China and Asian EM

2. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

3. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

4. 6857 🇯🇵 Advantest • Scoring & Valuation Update

2019 04 26 17 30 57

Source: Japan Analytics

ADVANTEST (6857 JP) reported FY2019 on 25th April and released initial forecasts for the current year which suggest that Operating Income will decline by 54% on a 19% decline in sales and a 23% decline in new orders. For details, please see LightStream Research‘s Insight here. This Insight will review the company’s forecasting track record, update our Scoring Charts and, based on our valuation methodology, suggest the current downside risk or short ‘potential’ after today’s near 9% decline.  We also highlight the 11% increase in net shares outstanding in the last five quarters.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut and more

By | Daily Briefs, Japan

In this briefing:

  1. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut

1. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut

Nissan

Early this morning the Yomiuri Shimbun reported that Renault SA (RNO FP) had decided to block Nissan CEO Saikawa’s reappointment at the company’s Annual Shareholders’ Meeting set to be held in late Jun, if he did not agree to a merger.

This move by Renault, or rather Paris, is to put it bluntly, absurdly clumsy and in our opinion goes a long way towards ensuring the death of the alliance. It also, together with Nissan Motor (7201 JP)‘s recent downward revision make the probability of a dividend cut more likely if things turn outright hostile.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala and more

By | Daily Briefs, Japan

In this briefing:

  1. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala
  2. WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale?
  3. China Meidong Auto (1268): Low Inventory to Carry On?
  4. Rakuten: Update on the Mobile Business Generally Positive
  5. Nexon: Continuing Question Marks

1. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala

Got

Last Week in Event SPACE …

  • As Nexon Co Ltd (3659 JP)‘s soap opera-esque “updates” on the control-change plod on, the “certainty” on this situation is less than great.
  • In the next six weeks, two important games (BTS World and Seven Deadly Sins) for Netmarble Games (251270 KS) will be launched; the final bidder(s) for NXC Corp/Nexon should be known plus there should be clarity on the timeline for the Netmarble Neo IPO. 
  • Trump Trade Wars provide a positive backdrop for Lynas Corp Ltd (LYC AU) in the near-medium-term.
  • From a tick-the-box perspective, Nissan Motor (7201 JP)‘s new board looks highly diverse.  If they take their jobs seriously and learn about auto manufacturing and sales, the board holds promise.
  • Harbin Electric Co Ltd H (1133 HK)‘s Offer is expected to get up after an unprecedented extension provides a last-minute reprieve.
  • The Murakami Tender Offer for Kosaido Co Ltd (7868 JP) fails. Spectacularly so.
  • Crane Co (CR US)‘s proposal for Circor International (CIR US) will fail unless it bumps and opens up a dialogue with Circor’s board.
  • Ayala Corporation (AC PM) buys back shares from Mitsubishi, removing the placement overhang.
  • Plus other events, CCASS movements and Mood Spins.

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

EVENTS

Nexon Co Ltd (3659 JP) (Mkt Cap: $14bn; Liquidity: $37mn)

A lot of the media coverage of the Nexon situation appears to be a kind of breathless updating of possible changes in situation trafficked by gossipmongers. The level of trustworthiness to the “news” is low and outlets rarely note that what is now being reported does not report with what was previously being reported as “likely.” Travis Lundy suggests the level of confidence one should have about the expectations the media is implying needs to be checked. There is simply not enough meat in the “facts” as reported to strongly inform market observers & participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even whether there could be a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

Delays were to be expected. and the possibility of significantly longer delays exists. The structure is convoluted – less easy than just buying Nexon outright. The structure could easily deter many buyers unless it is crystal clear that the rest of the stuff inside NXC is excluded from the sale. If delays are being implemented because major bidders can’t get the funds, that is either bad news on its own, or there is something else going on. If KJJ really wants a great premium when he decides to sell, he may turn this deal down – whoever the winning bid comes from.

  • The constant refrains about how Disney, EA, or Amazon might bid are probably misplaced. Travis Lundy doesn’t see any of them bidding. The US-China Trade War means US corporate buyers are not going to be the best buyers of game assets where 50% of revenue and 100% of profits come from China.
  • MBK/Tencent or KKR/Tencent is probably still the bidder to beat, as that consortium has been since the beginning. MBK would find it the easiest to take a sharp knife to costs. Tencent would find it easiest to buy 30-40% and then stay on the sidelines while someone else made it better. Neither Netmarble nor Kakao are likely to be the best buyers for this.
  •  This opportunity has been a great one to range-trade. In general, it has been “buy the dips, lighten up after it pops 5-10%. Rinse. Repeat.” Travis now views this as a low-quality Bullish trade. It is lower quality than it was 3-4 months ago because of reduced ability to range-trade and harvest gamma before a decision is made. The time decay is perceived to be quite strong now. That means sizing would probably be smaller now than it was at the same price or slightly lower in January. 

(link to Travis’ insight: Nexon: Continuing Question Marks)


Netmarble Games (251270 KS) (Mkt Cap: $7.9bn; Liquidity: $20mn)

The three major drivers of Netmarble’s stock price include the upcoming IPO of 80.6%-held Netmarble Neo (and the official global launch of the mobile RPG The King of Fighters Allstar game on May 9th), the launch of the BTS World game, and the eventual resolution of the NXC Corp/Nexon M&A situation. 

  • Douglas Kim believes a non-Netmarble Games entity such as MBK or Tencent Holdings (700 HK) will be the final bidder for Nexon. It was reported in early May that the Netmarble and MBK partnership broke off at the last minute as MBK determined it may not need a strategic investor to manage Nexon – key personnel in Nexon (excluding the founder Kim Jung-Joo) already play significant roles in directing and managing the company.
  • The market has been concerned about Netmarble potentially overpaying for NXC Corp with overstretched debt financing, and if Netmarble fails to be the final bidder for NXC Corp, this is probably a positive for the company. If the final bidder is MBK (only), this will also have an added positive impact on Netmarble as there have been fears that if Tencent acquires NXC Corp, this will potentially add to the competitive pressures of the gaming industry in Korea. 
  • These events, followed by an announcement of the Netmarble Neo IPO and a successful launch of the BTS World game should also positively impact Netmarble. In terms of earnings pickup, the consensus expects Netmarble to experience a turnaround starting 2Q19, with operating profit estimates of ₩46bn in 2Q19, up from ₩34bn in 1Q19. The consensus expects the company to further improve its operating profit to ₩100bn in 3Q19. 

(link to Douglas’ insight: Netmarble Games: The Upcoming Netmarble Neo IPO, Launch of BTS World Game, and the Nexon M&A)


Lynas Corp Ltd (LYC AU) (Mkt Cap: $1.1bn; Liquidity: $9mn)

Travis Lundy discusses the Lynas situation which appears to have changed dramatically this week. Lynas believes Malaysia will decide things the right way, which will mean the infamous December 4th Letter from the AELB (Atomic Energy Licensing Board) will be withdrawn, Malaysia approves the CondiSoil route for disposal of the WLP residue there now, and tthe license will get renewed with adequate transition time to enable continued buildup of WLP before sourcing of cracked and leached material exported from Australia can be arranged. This is the bet here. 

  • Travis thinks Lynas will need to create a new pricing system for its product. Its customers should be willing to pay a price which is not explicitly tied to Chinese onshore pricing with all the risk that entails. If its customers want to ensure Lynas stays in business, Lynas has to be able to charge what it needs to in order to stay in business. Western and Japanese companies with good technology to increase processing expertise to enable better product and higher margins will be happy/willing to engage with Lynas for the basic reason that Lynas is not Chinese. I’d note that they’d engage with the buyer of Lynas assets as well if Lynas went under, but the issue here is not bankruptcy but speed of increased capacity rollout.
  • This would suggest that partner companies with cash to invest should be willing to project-finance some portions of the capital and/or expansion. If Lynas needed or wanted to raise capital by issuing a convertible bond of a few hundred million dollars, Travis expects doing so would be “easy” in the near-term.
  • Travis is bullish the stock price near-term, not because of fundamentals, but due to the a) Trump Trade Wars being a good thing for product pricing and demand for access, and b) Geopolitical issues helping Malaysia come to the “right” decision regarding license renewal. He would not want to be short here anymore. Because the growth and value of long-term product pricing is so far out in the future, what constitutes “fair” for the stock is obviously tough to calculate with any confidence, so the “Bullish” label is really about covering the short.

(link to Travis’ insight: Trump Trade Means Lynas Capex Easier)


Nissan Motor (7201 JP) (Mkt Cap: $26bn; Liquidity: $115mn)

The new board of Nissan, as proposed by Nissan’s Provisional Nomination and Compensation Advisory Council established after the independent committee on governance proposed its measures in March, has 11 members, with two each nominated from Nissan and Renault SA (RNO FP) and seven coming in as independent directors.

  • The board is now set up to be Team Renault, Team Nissan, and seven (theoretically) independents. The important angle here is to try to understand where the chips might fall if push comes to shove, because the Revised Alliance Master Agreement requires that Renault not propose measures to the shareholders which are not supported by the Nissan board, and not vote against measures which are proposed by the board. Doing so would breach the RAMA and would allow Nissan to buy more Renault shares.
  • Only at the end of June – assuming all goes to plan – will the seven new members of the new Board take their seats. Renault pushing hard now when the majority of current board members will change in June seems to be insensitive to the nature of boards and board members’ responsibilities.  Should there be a strong dispute between Renault and Nissan about the process and timing of discussing deeper capital ties, Travis expects the ball to fall in the court of “Not Now” and “Not Yet.”
  • At 0.57x book on Nissan, it is difficult to be bearish. And it seemed pretty clear from the earnings meeting that Saikawa-san and others thought that the low forecast for FY19 (to March 2020) was reasonably conservative and was designed to flush out all the bad news. Nissan has decided to shrink its volume presence in the US to raise profitability per vehicle, and it is clear that there have been measures to reduce costs through redundancies. 
  • Travis remained inclined to think that RNO is the right trade to be long here compared to Nissan but is surprised that Renault is now down to such a low PBR. He was inclined to think that the significant slowdown in the Chinese market is a net headwind to both Nissan and Renault, but expects that the heightening of trade friction between China and the US could favour Japanese brands at the expense of US brands.

(link to Travis’ insight: Nissan’s New Board and Management Developments)


Briefly …

One Equity placed out 6.5mn shares of Celltrion Healthcare (091990 KS) at a final price of ₩60,100, an 8% discount to last close, similar to the discount back in September last year. There is a 90-day lockup on One Equity’s remaining 10% stake and it is possible Ion will reload. (link to Sanghyun Park‘s insight: Celltrion H Block Deals Priced at Floor: More Short Entry Points Should Be On the Way

M&A – ASIA-PAC

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $991mn; Liquidity: $3.5mn)

With acceptances totaling 85.84% of shares out as at the Closing Date (20 May), just short of the 90% acceptance condition, in an unprecedented move, the SFC granted an extension for Harbin’s Offer until the 19 July (Second Closing Date). If you’re going to set a precedent, then make it a bold one. Two months of additional time provides ample room to source, locate, and encourage shares not tendered (4.16% of shares out) to tender.

  • The withdrawal clause (Rule 17 of the Code) has now been clarified on the HKEx – the right-of-withdrawal of acceptances is triggered 21 days after the Closing Date (i.e. shares tendered are not irrevocable through to 19 July, as previously speculated in this insight). This is a voluntary right to withdraw – not compulsory – and assumes the Offer does not become unconditional before the expiry of the 21 days.
  • ~28mn shares are required to be tendered for the Offer to get up and 27.5mn have changed hands since the extension announcement.  The acceptance condition is likely to be satisfied shortly. An additional 5.7mn shares or 0.84% of shares out tendered on Friday.

(link to my insight: Harbin Electric: This Could Get Squeezy After Unprecedented Offer Extension)


Kosaido Co Ltd (7868 JP) (Mkt Cap: $164mn; Liquidity: $1.5mn)

The long extended close of the Tender Offer for Kosaido by renowned Japanese activist Yoshiaki Murakami and his affiliate companies, ended in failure. Travis had been bearish the stock once the Tender Offer was announced and the stock popped to the ¥850 area, and the shares did not trade below ¥750 (the Offer price) for much time at all after the announcement, but even he did not expect the result of only 427,000 shares tendered. That is less than 2% of the shares they did not hold. 85% of shares out did not tender.

  • Most people who bought in the past three and a half months are now (at the time of the insight) underwater on their investment, at a 70+% premium to the undisturbed price, after worse-than-expected results. And we have no resolution.
  • It would be tough to sell the funeral parlor business for 1x book because in its best year in the past five it earned a 5% ROE. To trade at book it should be able to do a little better than that.  The rest of the business has negative equity and a dire need for restructuring, which costs money. 
  • Travis is still bearish here and would not buy the dip in near-space. Even if the stock does not drop hard, it is pretty much dead money for a while. And while the stock trades below book, and there is a significant likelihood of bootstrap restructuring, Travis is inclined to think that transparency for shareholders will be no better than it has been for the last five years, which is pretty abysmal.

(link to Travis’ insight: Murakami Group Tender for Kosaido Fails… Spectacularly)


Asiana Airlines (020560 KS) (Mkt Cap: $1bn; Liquidity: $48mn)

More than a month has passed since Asiana Airlines was officially put up for sale by the Asiana Airlines’ main creditor (KDB) and Kumho Industrial (002990 KS), the leading shareholder of Asiana. Since then, a few chaebols that were initially mentioned as potential acquirers of Asiana including SK, Hanwha, CJ, Lotte, Hanjin, and Shinsegae groups – all have been very quiet in their willingness to purchase the company. 

  • Among these chaebols, Aekyung has shown the highest initial interest. It may require nearly ₩2.0tn to ₩2.5tn to acquire Asiana Airlines, which will likely involve additional rights offering/debt financing.
  • Because of the uncertainty on timing and potential buyers wary of the high debt amount and lofty purchase price, expect Asiana to continue to trend lower in the next few weeks. There is a strong support in the low ₩5,000 level, meaning there could be a further 10-15% downside risk. 

(link to Douglas’ insight: Korea M&A Spotlight: Aekyung – The Leading Candidate to Acquire Asiana Airlines at Reduced Prices?)

M&A – US

Circor International (CIR US) (Mkt Cap: $850mn; Liquidity: $8mn)

Crane Co (CR US) announced a proposal to acquire Circor, a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45/share (cash), for a total equity value of $895mn and an EV of $1.55bn ($1.7bn if net pension liability is included). The proposal represents a 47% premium to last close. Circor rejected the proposal on the 13 May, so Crane has gone public to “make our proposal known to Circor shareholders so they can express their views directly to the Circor Board.”

  • Circor’s EBITDA margins are lower than the mean/median of the comps and are the lowest of any company in the entire group, giving credence to Crane’s criticisms of Circor’s operating performance. From Crane’s presentation, Circor is the worst performer amongst its peer group and also missed all five-year targets (set in 2014).
  • John DeMasi reckons this deal will be an uphill battle for Crane if it decides to go “hostile” with a formal offer – it would fail without a board recommendation. The next step would be to increase their proposal to give Circor’s board an opportunity to show it is not totally intransigent. A $4 bump to $49 would be a meaningful interim increase (8.9%). If that doesn’t get Circor talking, the board would come under pressure from shareholders.  Other bidders could be drawn out if it gets Circor talking.
  • Even though this is a highly speculative situation (with downside of ~29% using Friday’s close), John liked it (sized appropriately at the then-current price $41.37) because of the potential upside and confidence that an independent, competent board will listen to its shareholders if enough of them are loud enough for long enough.

(link to John’s insight: Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted)


Mellanox Technologies Ltd (MLNX US) (Mkt Cap: $850mn; Liquidity: $8mn)

The past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratcheting up of trade tensions between the US and China – Nvidia Corp (NVDA US)‘s $125/share Offer is conditional on the receipt of antitrust clearance from China.  Financial media and pundits have been quick to reference Qualcomm Inc (QCOM US)‘s failed bid for  Nxp Semiconductors Nv (NXPI US) last year as why this may not bode well for the NVDA/MLNX transaction. But Robert Sassoon sets out a case as to why this deal may not be the right reference.

  • He believes the Marvell Technology Group Ltd (MRVL US)/Cavium Inc (CAVM US) deal provides a more positive perspective on the prospects for NVDA/CAVM deal completion than QCOM/NXPI. Furthermore, the merger agreement expires on December 10, 2019, which also accommodates two three-month extensions. This leaves a long runway for the deal to obtain the required regulatory approvals, and a time buffer for the current political heat to cool down either through some type of trade agreement between US and China or progress towards one. 
  • Friday’s closing price of $109.80 is only slightly above the pre-announcement price. In August-September 2018 period when speculation of a possible MLNX buy-out began, shares were trading in the $70-$80 range, at a valuation multiple of 9x-10x & 14x-16x prospective Non-GAAP 2018 EBITDA & PE.  However, consensus estimates for 2019 are projecting a ~30% increase in both EBITDA and EPS, indicating little fundamental justification for a return to that range. This suggests limited downside for the shares of a fast-growing company that is trading at below peer multiples. On balance, the risk-reward profile of MLNX looks attractive from our standpoint. 

(link to Robert’s insight: MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread)


Briefly …

Sprint Corp (S US) has received approval from the FCC for the merger with T-Mobile to proceed following concessions. The Justice Department approval is outstanding and Sebastian Ashton, CFA believes the outcome remains uncertain. He reiterates investors should look to exit the bonds at current valuations given they are trading at a premium to par, in order to mitigate deal risk exposure. If the merger fails, the company may face liquidity issues over the medium term given their deteriorating fundamental performance and negative free cash flow. (link to Sebastian’s insight: Sprint Corp – One Regulatory Approval, Another to Go, How Likely?)

STUBS & HOLDCOS

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

JCNC’s discount to NAV of 14.4% is around its narrowest in the past 12-months and compares to an average of ~20%.  The key trigger for JCNC’s recent outperformance appears to be the cancellation of the offer for Bank Permata (BNLI IJ).

  • Both Standard Chartered Bank and Astra hold 44.56% in BNLI, leaving minorities with 10.88%. First rumoured back in November/December, state-owned Bank Mandiri Persero (BMRI IJ) was understood to be the frontrunner to acquire the stakes held by Astra and St Chart. 
  • The speculated price sought by BNLI was 1.8x P/B, dropping to 1.6x, then 1.4x, before talks were allegedly abandoned last week. There has been no official announcement/comment (and in my own correspondence with the IR) from Astra on this sale. Astra’s stake in BNLI accounts for 3.6% of its market cap – not a material %.  
  • JCNC is prodding its narrowest discount to NAV in the past year, having all-but reversed its 4Q18 lows. There may be further upside for JCNC, but it appears limited. BNLI is for sale and is currently trading at 1.0x P/B. I would not be surprised to see further dialogue initiated on a proposed sale.

Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

Ayala Corp’s discount (at the time of my insight) to NAV had bounced off a 12-month low but still traded 2Stdevs+ from the average, and below the 12.9% level when I previously discussed this Holdco in greater detail in late April. ACs 1Q19 figures released on the 10 May did not endear investors to the stub ops.  

  • Mitsubishi’s 6.58% stake remains an overhang – however, there appears no urgency for another placement with AC trading a YTD lows. On the assumption these share placements bolster full-year results (March year-end), Mitsubishi can afford to wait for a recovery in the share price.  However, this assumes there is a near-term recovery with respect to this placement.
  • This recent set of quarterly results at the parent level is not positive. Expect the discount to NAV to drift sideways, if not lower without the benefit of any positive newsflow at the stub ops – or on the placement – until 1H results announced around mid-August clarify the earnings direction for 2019. 
  • If Mitsubishi is indifferent to selling as its in-cost is a fraction of the current price, the spectre of declining (& a protracted decline in) stub earnings may tilt them to place shares earlier.
    • UPDATE: AC announced it had bought back 3.8m shares from Mitsubishi Corp at PHP 838, a 1.5% discount to the prior day’s close. “This transaction completes their portfolio rebalancing exercise with regard to their Ayala holdings, which now stands and will remain at around six percent (6%).”  Positive news for Ayala and a nice bounce – it closed the week at 11.5% discount to NAV against a 12-month low of 16% on the 21 May.

(link to my insight: StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower)

SPIN-OFFS – HONG KONG

A number of Hong Kong spin-offs, including  Haitong UniTrust International Leasing Co Ltd (1905 HK) (HUIL) and Xinyi Energy Holdings Ltd (3868 HK), have been announced recently. Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have also made announcements to spin-off certain divisions, although these remain subject to Exchange approvals and market conditions. Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

  • Haitong Securities Co Ltd (H) (6837 HK)‘s implied stub ops appear slightly expensive versus peers. Haitong Sec has underperformed both its peers and HSI since the initial spin-off announcement back in March 2017. However, stub income halved in FY18 compared to a 28% decline on average for peers. At ~15% of market cap, this is a weak Holdco/subsidiary relationship. HUIL is expected to commence trading on the 3 June. 
  • Xinyi Solar Holdings (968 HK)‘s performance and valuation (with reference to its stubs ops) relative to peers, appears overextended, notably for operations with declining growth and net margins. The implied stub is near a 52-week high. At between 35-45% of market cap, this will be a new Holdco/subsidiary relationship to follow, depending on XEH’s volume. XEH is expected to commence trading on the 28 May.
  • Legend Holdings Corp H (3396 HK)‘s proposed spin-off of Zhengqi Financial has all the hallmarks of being a weak Holdco/subsidiary relationship; as does Kerry Logistics Network (636 HK)‘s proposed spin-off and separate listing of Kerry Express (Thailand) on the stock exchange of Thailand. Tianneng Power Intl (819 HK)‘s spin-off of its battery manufacturer may result in a stub to watch, however financial details of the spin-off are minimal, it still requires PRC approval, and the spin-off was previously attempted back in 2015.

links to insights:
SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int’l Leasing
SPINOFF: Xinyi Solar Spinoff of Xinyi Energy

SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

OTHER M&A UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

19.81%
GS
Core Pac
17.14%
Anue
Kim Eng
Zhongchang (859 HK)
74.98%
Cinda
Bocom
TUS International
19.41%
China Sec
Outside CCASS
26.75%
China Ind
Outside CCASS
Source: HKEx

2. WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale?

The World Health Organization (WHO) finally made its long-awaited decision on officially classifying game addiction disorder as a disease on May 25th. In June 2018, the WHO already included gaming disorder on the “11th revision of its international classification of diseases.” The WHO has been reviewing this issue for nearly 11 months and it finally made its decision on classifying it as an official disease. 

Will this issue become a “deal breaker” for the Nexon sale? No, we do not believe that WHO finally deciding that gaming disorder is a disease will serve as a deal breaker. Nonetheless, we believe that it will have a negative impact on the game industry as a whole and will be an important factor that could bring down the potential purchase price. 

Three Key Issues of WHO’s decision to Classify Gaming Addiction as Disease to the Nexon Sale:

  • How much has the market already taken this into account? 
  • Gaming taxes? 
  • Greater negative perception of gaming

3. China Meidong Auto (1268): Low Inventory to Carry On?

China%20meidong%20auto%20total%20rev

Luxurious auto car distribution in China sounds like a great business to have, supported by the rising number of wealthy individuals springing up in various parts of the Middle Kingdom. However, the sector seems to be very fragmented where no single companies is able to have significant market share as none of them has exclusive distribution rights over a particular foreign brand including China Meidong Auto (1268 HK)

The recent share price surge powered by growth expansion from the single city single store initiative (in third and fourth tier cities) may not last long as there is nothing stopping any competitor to expand to these markets when demand still outstrip supply therefore margin is better compared to the first tier cities. However, it also brings the question whether the fresh demand from the new wealth in the third and fourth tier cities have enough depth to sustain China Meidong Auto’s sales growth.

4. Rakuten: Update on the Mobile Business Generally Positive

Rakuten Inc (4755 JP) hosted a call with CTO Tareq Amin to update analysts and investors on recent progress. The company says cell site acquisition is moving ahead quickly and it an end-October mobile launch remains the target. As discussed previously, the next major milestone is the start of 1 July beta-testing so there was little that could be added this week although management did again run through key success factors like cost and operational efficiency from its cloud-based integrated network architecture. Mr. Amin teased a possible game-changing announcement next week, which is likely to come from the vendor side and we suspect has to do with 5G turnkey solutions. Coming out of quarterly results for all companies, the outlook has not meaningfully changed with incumbents confident that pricing changes are sufficient even with Rakuten promising disruption from a unique network and installed base of eCommerce/fintech users. 

5. Nexon: Continuing Question Marks

Screenshot%202019 05 24%20at%203.54.18%20am

The Nexon Co Ltd (3659 JP) control-change saga plods on. 

I continue to read all the news that’s fit to print in English, Japanese, and Korean if I can find some web service to translate the hangul. 

My continuing worry about the significant number of articles which get published is that the ‘updates’ provided are much more soap opera-esque than really significant news developments or even insightful commentary which could inform market observers and participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

For this, I have a lower expectation of “certainty” on this situation than I expected I would have by now, and because of the passage of time, the NPV of the trade is slightly lower with a higher volatility of jump risk on eventual outcome than I expected it would have (I expected the components of the NPV to change – certainty would raise NPV while time-decay before announcement would drag on deal NPV, but the lack of certainty has added drag).

More comments about news evolution, content, and trading strategy are below.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut and more

By | Daily Briefs, Japan

In this briefing:

  1. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut
  2. Japan Banks – Unloved for Many Reasons

1. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut

Nissan

Early this morning the Yomiuri Shimbun reported that Renault SA (RNO FP) had decided to block Nissan CEO Saikawa’s reappointment at the company’s Annual Shareholders’ Meeting set to be held in late Jun, if he did not agree to a merger.

This move by Renault, or rather Paris, is to put it bluntly, absurdly clumsy and in our opinion goes a long way towards ensuring the death of the alliance. It also, together with Nissan Motor (7201 JP)‘s recent downward revision make the probability of a dividend cut more likely if things turn outright hostile.

2. Japan Banks – Unloved for Many Reasons

1

The Bank of Japan (BOJ) offers negative interest rates on monies deposited. Japan’s banks are largely wholesale, with lumpy corporate loans and in many cases, where they look after corporate interests more than shareholders. Some consider the largest banks in Japan like closed-end mutual funds – but with credit risk -due to their gigantic equity holdings. These all remain valid reasons to shun Japan’s banks in favor of others in the region.  Credit costs are another concern. With BOJ’s new announcement of continuing low rates there remains even less hope that loan volume will support profit and that NIM pressure will remain. A negative delta in credit costs is not easily absorbed by anaemic ROA. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: Japan Banks – Unloved for Many Reasons and more

By | Daily Briefs, Japan

In this briefing:

  1. Japan Banks – Unloved for Many Reasons
  2. Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge
  3. Zozo: The Tesla of Apparel Ecommerce

1. Japan Banks – Unloved for Many Reasons

1

The Bank of Japan (BOJ) offers negative interest rates on monies deposited. Japan’s banks are largely wholesale, with lumpy corporate loans and in many cases, where they look after corporate interests more than shareholders. Some consider the largest banks in Japan like closed-end mutual funds – but with credit risk -due to their gigantic equity holdings. These all remain valid reasons to shun Japan’s banks in favor of others in the region.  Credit costs are another concern. With BOJ’s new announcement of continuing low rates there remains even less hope that loan volume will support profit and that NIM pressure will remain. A negative delta in credit costs is not easily absorbed by anaemic ROA. 

2. Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge

8350 michinoku 2019 0424%20peer%20valuations

With just three weeks to go before the formal announcement of their FY3/2019 results, it is high time that some of the smaller Japanese regional banks started owning up to the fact that they have no hope of making their full-year earnings guidance.  First in the line for confession is Michinoku Bank (8350 JP) which on Wednesday of this week slashed its full-year earnings guidance after losing some ¥1.25 billion (US$11.2 million) on the burgeoning costs of maintaining a synthetic hedge against its Japanese government portfolio.  These hedging losses come on top of rapidly rising credit costs.  Luckily, few foreign investors own the stock of this small, struggling bank, although there are some.  We expect further announcements of full-year earnings downgrades from other Japanese regional banks over the next fortnight or so; market reaction to such announcements may be severe.  Caveat emptor!  (May the buyer beware!)

3. Zozo: The Tesla of Apparel Ecommerce

Zozo%20net%20adds

ZOZO Inc (3092 JP) released weak results (-14% vs. consensus) and guidance (-10.2% vs. consensus) at the OP level. The company did announce the stoppage of the unpopular Zozoarigatou service which caused so much friction with merchants and it is likely that the market was far below consensus, so the stock initially reacted positively. As the reality of the failure of various attempts to generate a new growth driver sets in though, the stock is now down almost 10%.

Resident Japan Consumer expert Michael Causton has an excellent summary of the results in ZOZO: No More Thank Yous and Less Profit Too

We delve into some of our own concerns regarding the future growth outlook below.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: Japan Banks – Unloved for Many Reasons and more

By | Daily Briefs, Japan

In this briefing:

  1. Japan Banks – Unloved for Many Reasons
  2. Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge
  3. Zozo: The Tesla of Apparel Ecommerce
  4. Advantest: FY03/19 Full-Year Results Beat Consensus, 4QFY03/19 Declines Due to Memory Downturn

1. Japan Banks – Unloved for Many Reasons

1

The Bank of Japan (BOJ) offers negative interest rates on monies deposited. Japan’s banks are largely wholesale, with lumpy corporate loans and in many cases, where they look after corporate interests more than shareholders. Some consider the largest banks in Japan like closed-end mutual funds – but with credit risk -due to their gigantic equity holdings. These all remain valid reasons to shun Japan’s banks in favor of others in the region.  Credit costs are another concern. With BOJ’s new announcement of continuing low rates there remains even less hope that loan volume will support profit and that NIM pressure will remain. A negative delta in credit costs is not easily absorbed by anaemic ROA. 

2. Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge

8350 michinoku 2019 0424%20peer%20valuations

With just three weeks to go before the formal announcement of their FY3/2019 results, it is high time that some of the smaller Japanese regional banks started owning up to the fact that they have no hope of making their full-year earnings guidance.  First in the line for confession is Michinoku Bank (8350 JP) which on Wednesday of this week slashed its full-year earnings guidance after losing some ¥1.25 billion (US$11.2 million) on the burgeoning costs of maintaining a synthetic hedge against its Japanese government portfolio.  These hedging losses come on top of rapidly rising credit costs.  Luckily, few foreign investors own the stock of this small, struggling bank, although there are some.  We expect further announcements of full-year earnings downgrades from other Japanese regional banks over the next fortnight or so; market reaction to such announcements may be severe.  Caveat emptor!  (May the buyer beware!)

3. Zozo: The Tesla of Apparel Ecommerce

Zozo%20net%20adds

ZOZO Inc (3092 JP) released weak results (-14% vs. consensus) and guidance (-10.2% vs. consensus) at the OP level. The company did announce the stoppage of the unpopular Zozoarigatou service which caused so much friction with merchants and it is likely that the market was far below consensus, so the stock initially reacted positively. As the reality of the failure of various attempts to generate a new growth driver sets in though, the stock is now down almost 10%.

Resident Japan Consumer expert Michael Causton has an excellent summary of the results in ZOZO: No More Thank Yous and Less Profit Too

We delve into some of our own concerns regarding the future growth outlook below.

4. Advantest: FY03/19 Full-Year Results Beat Consensus, 4QFY03/19 Declines Due to Memory Downturn

Advantest%20earnings

  • Advantest (6857 JP) reported its 4QFY03/19 and Full-year FY03/19 results yesterday (25th of April). The company reported 36.3% YoY growth in revenue for the full-year while its operating profit more than doubled to JPY64.7bn during the year mainly due to strong performance witnessed during the first three quarters of the year.
  • On a quarterly basis, the 4QFY03/19 numbers were below our expectations. Both the revenue and the operating profit witnessed YoY declines during the quarter, with revenue declining by 5.7% YoY while operating profit declined by a significant 26.6% YoY driven by the slowdown in the global semiconductor market.
  • Furthermore, the management expects a decline in revenue and operating profit for full-year FY03/20 due to contraction in the global semiconductor tester market. That being said, the company is expecting the market to return to its growth trajectory again during CY2020 driven by the expansion of commercial 5G communication services.
  • We believe Advantest is still overvalued at its current price of JPY3,445 per share. As the memory market downturn has just started impacting Advantest, we feel the company share price will decline further with the earnings outlook deteriorating.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: Cashless Payments to Reach 60% of Japanese by 2027, Already Popular Among Young and more

By | Daily Briefs, Japan

In this briefing:

  1. Cashless Payments to Reach 60% of Japanese by 2027, Already Popular Among Young

1. Cashless Payments to Reach 60% of Japanese by 2027, Already Popular Among Young

Cashless

Japan is embracing cashless payments wholeheartedly, and the government’s target to reduce the ratio of cash to other mechanisms to 40% by 2027 could be reached early. Even so, cash remains king for small retailers, restaurants and even convenience stores.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: Cashless Payments to Reach 60% of Japanese by 2027, Already Popular Among Young and more

By | Daily Briefs, Japan

In this briefing:

  1. Cashless Payments to Reach 60% of Japanese by 2027, Already Popular Among Young
  2. Lawson Offers Customer Returns Service to Online Vendors Cementing CVS Role in E-Commerce
  3. Kosaido: The Bull Case, The Bear Case, and the Base Case

1. Cashless Payments to Reach 60% of Japanese by 2027, Already Popular Among Young

Cashless

Japan is embracing cashless payments wholeheartedly, and the government’s target to reduce the ratio of cash to other mechanisms to 40% by 2027 could be reached early. Even so, cash remains king for small retailers, restaurants and even convenience stores.

2. Lawson Offers Customer Returns Service to Online Vendors Cementing CVS Role in E-Commerce

Lawson is opening up its store and logistics network to provide a customer returns service to third-party vendors, affirming its role as a hub for e-commerce transactions. The move follows the expansion of Lawson’s online food service, Loppick.

3. Kosaido: The Bull Case, The Bear Case, and the Base Case

Screenshot%202019 04 25%20at%2011.26.39%20pm

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and Companies Act, and the lack of liability of directors for their own decisions is that they can hang their hat on totally irrational economic arguments and there are no repercussions. 

This event started with a situation where a new CEO from outside the company decided – after only a few months in the job – to recommend an MBO with outside capital – to take over Kosaido Co Ltd (7868 JP) at an extremely hefty discount to book value. 

The original proposal was ¥550/share or 0.5x book, and the directors haggled to get it all the way to ¥610/share, which was 0.555x book. The independent directors recommended that investors sell. 

The idea was that this takeover would increase medium to long-term corporate value by allowing the new investor to finance rehabilitation efforts. 

But that does not matter to minority shareholders. If they sell, they lose the right to participate in those efforts at rehabilitation. Instead, the directors effectively said to minority investors… 

“Half of book is the best you are going to do [and we, as directors, bear no responsibility for getting you pushed out of your equity at a 50% writedown]”

They didn’t actually come out and say it that way, but actively recommending investors sell at 0.5x book boils down to the same thing. When I first covered this in January, my conclusions were that:

  • This was a virtual asset strip in progress. When proposed by hedge funds it makes them “abusive acquirers” (cf Tokyo High Court ruling in July 2007 w/r/t Steel Partners Japan and Bulldog Sauce) but if done by PE funds with the help of management, it promotes medium-to-long-term growth of corporate value.

  • The concept is, of course, ludicrous. Minority shareholders who sell have zero interest in the future gains of the company when it is taken private. If the tender were to be successful, minority shareholders who don’t sell are forced out anyway. 

  • It was a freebie for Bain, allowing junior PE partners and associates something on which to cut their teeth and pay for themselves.

  • This company and its management is a perfect example of why investors should be spending more time on their stewardship and the governance of their portfolio companies.

  • It is also why investors should be taking a very close look at the METI request for public comment on what constitutes “Fair M&A” especially as regards MBOs.

  • If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

One well-known activist obviously shared my opinion and bought 10% of the company at around the Tender Offer Price quite quickly. This created expectations of a bump and the stock popped 30%. That activist proposed their own tender offer to management and the original Offeror (Bain Capital Japan) raised their price another ¥90/share at ¥700/share and declared it final. 

The Murakami entities came out with their own Tender Offer on March 22 at ¥750/share and the directors of Kosaido withheld judgment on the Murakami Tender Offer (officially launched by Minami Aoyama Real Estate) and showing a modicum of good sense, suggested that with the higher tender offer price in the market, they supported the Bain Tender Offer but could not recommend that shareholders tender into the Bain Tender Offer when the Murakami Tender Offer offered more money. 

The New News

Today, Kosaido came out with lower “forecasts” for the year to this past 31 March (official results should be out in about two weeks). Revenue guidance for the full year was lowered by 2.7% to ¥36bn. OP guidance was lowered by ¥300 million or 12% to ¥2.2bn, and Net Profit guidance was lowered by ¥900 million. That consisted of ¥385mm of writedowns at the parent company in the “info” business (the one which needs restructuring according to the original Tender Offer documentation) and a ¥490mm provision for loan receivables at the funeral parlor business. In addition, there was a ¥900 million impairment on assets at a building (Ohana Chaya Kaikan) adjacent to (i.e. part of) the Yotsugi Parlor site in the funeral parlor business.

Given the Ohana Chaya Kaikan was shut down for a year or more to completely renovate it along with the Yotsugi Parlor, and it only reopened two years and five months ago, a writedown like this would seem to be extremely bad form.

That was perhaps a kitchen-sinking. 

The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share because they are not certain about whether it would possibly injure the company’s medium-to-long-term corporate value. 

So… Kosaido directors WERE able to recommend minority shareholders sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) just a few months ago, but NOW CANNOT RECOMMEND to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

This is bad. 

Kosaido management has proposed no alternative to the Murakami Tender. There is no monetization plan for the “good” assets to help support the “bad” assets which need restructuring. The stock is still trading above the Murakami Tender Price. The board is “neutral” and if it does not go through, there could be more pain ahead. Even if it does go through, there could be more pain ahead. 

There is a Bull Case, A Base Case, and a Bear Case.

The Bull Case requires a lot of hard work, likely no small amount of pain, with possible path-dependent indignities to be suffered by investors, and it probably results in a wholesale restructuring of both the info and funeral parlor businesses to get to a point where the business is worth less than current book value (now down to ~¥1060). The Bear Case is indeed quite bearish. This stock was trading at ~¥400/share prior to the MBO proposal when profits were supposed to be substantially better. If the Base Case is that the tender goes through and everyone tenders, obliging delisting, that means investors still probably lose.

More discussion below.


As a history, the following insights have been published on this event…

Previous Insights on the Kosaido Situation Published on Smartkarma…

DateBuy/SellPriceInsight
21-JanBuy¥609Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
7-FebSell¥775Kosaido: Activism Drives Price 30+% Through Terms
19-FebSell¥703Kosaido TOB (7868 JP) Situation Gets Weird – Activists and Independent Opposition to an MBO.
26-FebBuy¥738Kosaido (7868 JP) TOB Extended
19-MarBuy¥748Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
21-MarBuy¥737Murakami-San Goes Hostile on Kosaido (7868 JP), Overbids Bain’s “Final” Offer
24-MarSell¥859Kosaido (7868 JP) Reaches Value You Can Sell
TodaySell¥771This insight

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Japan: WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale? and more

By | Daily Briefs, Japan

In this briefing:

  1. WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale?
  2. China Meidong Auto (1268): Low Inventory to Carry On?
  3. Rakuten: Update on the Mobile Business Generally Positive
  4. Nexon: Continuing Question Marks
  5. The Global Recovery Narrative Crumbles

1. WHO Officially Decides Gaming Addiction Disorder as A “Disease” – Impact on the Nexon Sale?

The World Health Organization (WHO) finally made its long-awaited decision on officially classifying game addiction disorder as a disease on May 25th. In June 2018, the WHO already included gaming disorder on the “11th revision of its international classification of diseases.” The WHO has been reviewing this issue for nearly 11 months and it finally made its decision on classifying it as an official disease. 

Will this issue become a “deal breaker” for the Nexon sale? No, we do not believe that WHO finally deciding that gaming disorder is a disease will serve as a deal breaker. Nonetheless, we believe that it will have a negative impact on the game industry as a whole and will be an important factor that could bring down the potential purchase price. 

Three Key Issues of WHO’s decision to Classify Gaming Addiction as Disease to the Nexon Sale:

  • How much has the market already taken this into account? 
  • Gaming taxes? 
  • Greater negative perception of gaming

2. China Meidong Auto (1268): Low Inventory to Carry On?

China%20meidong%20auto%20net%20margin

Luxurious auto car distribution in China sounds like a great business to have, supported by the rising number of wealthy individuals springing up in various parts of the Middle Kingdom. However, the sector seems to be very fragmented where no single companies is able to have significant market share as none of them has exclusive distribution rights over a particular foreign brand including China Meidong Auto (1268 HK)

The recent share price surge powered by growth expansion from the single city single store initiative (in third and fourth tier cities) may not last long as there is nothing stopping any competitor to expand to these markets when demand still outstrip supply therefore margin is better compared to the first tier cities. However, it also brings the question whether the fresh demand from the new wealth in the third and fourth tier cities have enough depth to sustain China Meidong Auto’s sales growth.

3. Rakuten: Update on the Mobile Business Generally Positive

Rakuten Inc (4755 JP) hosted a call with CTO Tareq Amin to update analysts and investors on recent progress. The company says cell site acquisition is moving ahead quickly and it an end-October mobile launch remains the target. As discussed previously, the next major milestone is the start of 1 July beta-testing so there was little that could be added this week although management did again run through key success factors like cost and operational efficiency from its cloud-based integrated network architecture. Mr. Amin teased a possible game-changing announcement next week, which is likely to come from the vendor side and we suspect has to do with 5G turnkey solutions. Coming out of quarterly results for all companies, the outlook has not meaningfully changed with incumbents confident that pricing changes are sufficient even with Rakuten promising disruption from a unique network and installed base of eCommerce/fintech users. 

4. Nexon: Continuing Question Marks

Screenshot%202019 05 24%20at%203.54.18%20am

The Nexon Co Ltd (3659 JP) control-change saga plods on. 

I continue to read all the news that’s fit to print in English, Japanese, and Korean if I can find some web service to translate the hangul. 

My continuing worry about the significant number of articles which get published is that the ‘updates’ provided are much more soap opera-esque than really significant news developments or even insightful commentary which could inform market observers and participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

For this, I have a lower expectation of “certainty” on this situation than I expected I would have by now, and because of the passage of time, the NPV of the trade is slightly lower with a higher volatility of jump risk on eventual outcome than I expected it would have (I expected the components of the NPV to change – certainty would raise NPV while time-decay before announcement would drag on deal NPV, but the lack of certainty has added drag).

More comments about news evolution, content, and trading strategy are below.

5. The Global Recovery Narrative Crumbles

1%20 %20copy

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.