Japan

In today’s briefing:

Itochu Keeps Buying Fuji Oil, Takeover Offer Could Be Possible With Shares Near The Cyclical Bottom
Skymark IPO – Valuation
Again, It Is the BOJ’s ETF Issue that Makes Us Think

Itochu Keeps Buying Fuji Oil, Takeover Offer Could Be Possible With Shares Near The Cyclical Bottom

By Oshadhi Kumarasiri

Itochu Corp (8001 JP) has restarted accumulating Fuji Oil Holdings (2607 JP) shares, with an acquisition of 3.5m shares during the last-quarter to take its ownership percentage in Fuji-Oil to 44%.
With both earnings and valuations at a cyclical bottom, Itochu could be encouraged to accumulate more Fuji Oil shares in the short term, resulting in Fuji Oil outperforming its peers.
We think even a takeover offer could be possible while the share price is hovering near the cyclical bottom.

Skymark IPO – Valuation

By Mio Kato

Skymark is a little difficult to value given wide dispersions in peer multiples and earnings recovery trajectories.
However, on balance we believe the issue looks to be on the cheap side.
In addition, there are several quirks to the balance sheet, not all of which are negative.

Again, It Is the BOJ’s ETF Issue that Makes Us Think

Although the stock split doesn’t raise the intrinsic value of the stock, the stock price is likely to rise on the speculation that future purchases into the NISA are expected.
As cross-shareholdings decline, the companies are actively engaging in IR activities with individual investors to secure shareholders who share the company’s position against foreign shareholders who are increasing their presence.
Some believe that NISA will be used as receptacle for the disposal of BOJ’s ETF holdings, but companies may hope that the silent shareholder hold ETFs as long as possible.

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Dec 01

Daily Brief Japan: Toyo Construction, Softbank Group, Appier Group, Nippon Shinyaku, Rakuten Inc, Sky Perfect Jsat and more

In today’s briefing:

Toyo Construction (1890) – Creeping Up On The Next “Tender Offer Start Date”….. Uh…. Maybe
Softbank Group (9984 JP) –The Masa Hurdles
Appier (4180) Nearing A TSE Prime (And TOPIX) Announcement?
Nippon Shinyaku (4516 JP): Viltepso Has Strong Muscle Power; New Seizure Drug Launch in Japan
Rakuten (Neutral) – Follow up After Results: Mobile Issues Far from Over
Sky Perfect JSAT (Buy) – Q2 Follow up Plus Amazon Proof of Concept for Space Compass

Toyo Construction (1890) – Creeping Up On The Next “Tender Offer Start Date”….. Uh…. Maybe

In March 2022, Toyo Construction (1890 JP) agreed to be taken over by equity affiliate stake owner INFRONEER Holdings (5076 JP) at what was a low price.
Nintendo Founder Family Office “YFO” objected, and bought 25+% of the company, then offered to buy it out 30% higher. Toyo Construction objected.
Four months later they finally signed an NDA and then started negotiating. Early in November the target date for a Tender Offer start by YFO was pushed to early December.

Softbank Group (9984 JP) –The Masa Hurdles

By Victor Galliano

Masayoshi’s debt with Softbank group is big, and due to the poor performance of SoftBank Vision Fund 2, Masa’s equity interest as a co-investor is now zero
Internal hedge fund Northstar, in which Masa has a 33.3% stake, is in liquidation leaving Masa’s share of his Northstar debt to SoftBank at USD1.2bn
SoftBank’s collateral on Masa debt includes the Vision Fund 2 equity, as well as SoftBank shares and other personal assets; we expect SoftBank’s NAV discount of c 25% to widen

Appier (4180) Nearing A TSE Prime (And TOPIX) Announcement?

On 17 Feb 2022, Janaghan Jeyakumar, CFA wrote about Appier Group (4180 JP) suggesting it was a TOPIX inclusion candidate in the not-distant future.
In mid-August 2022, he reiterated his opinion. Three days later, the company said they had applied for TSE Prime membership. We are coming up on the timing for an announcement.
It would mean buying, but the shareholder structure is interesting, and intentions are not easy to read. But if they announce imminently, the calendar makes the event even more interesting.

Nippon Shinyaku (4516 JP): Viltepso Has Strong Muscle Power; New Seizure Drug Launch in Japan

By Tina Banerjee

Driven by continued strong performance of Viltepso and other partnered drugs, Nippon Shinyaku (4516 JP) is expected to report accelerated revenue growth momentum.
Viltepso is expected to be the top selling drug of Nippon Shinyaku in FY23. For FY23, the drug is expected to report revenue of ¥14.7 billion (+90% y/y).
In November, Nippon Shinyaku launched Fintepla (fenfluramine) for the treatment of seizures in patients with Dravet syndrome (DS) as an add-on therapy to other anti-epileptic medicines in Japan.

Rakuten (Neutral) – Follow up After Results: Mobile Issues Far from Over

By Kirk Boodry

Rakuten’s successful junk bond sale means the Rakuten Bank IPO will happen next year and not in December as some had feared
More detail on mobile shows that network costs including D&A are 4x that of service revenue and slightly higher QoQ. Roaming alone is higher than service revenue
And that means Rakuten can’t aggressively go after new subscribers unless it wants operating losses to accelerate. Bad for Rakuten but good news for incumbents KDDI, NTT and Softbank.

Sky Perfect JSAT (Buy) – Q2 Follow up Plus Amazon Proof of Concept for Space Compass

By Kirk Boodry

We are publishing updated forecasts and commentary for Sky Perfect after meeting the company post-results
Media results were predictably weak but the company hopes to make up ground in H2 as it ramps up marketing spend to support sport packages that launch in Spring
Amazon’s reveal that it has tested LEO-based satellite software highlights cloud platform interest in space ICT infrastructure like that being pursued by Sky Perfect JSAT and NTT

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Nov 30

Daily Brief Japan: Sony Corp, SBI Holdings, J Front Retailing, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

SONY (6758) | Regulators – Duty Calls
JPX-Nikkei 400 Rebal 2023: End-Nov 2022
J Front Gets into Gaming to Drive Young Customers to Buildings
Is TSE Being Too Strict with the Honor Students and Too Lenient with the Underdogs?

SONY (6758) | Regulators – Duty Calls

By Mark Chadwick

The next six months will be critical for the future of the global gaming industry as Regulators carry out further investigations into the Microsoft acquisition of Activision
This is particularly important for SONY, where games account for around one third of consolidated revenue and profits
This is a battle for the future of subscription services and cloud streaming – Call of Duty yields unprecedented power over the industry. Regulators need to do their Duty.

JPX-Nikkei 400 Rebal 2023: End-Nov 2022

By Janaghan Jeyakumar, CFA

JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents.
A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. We look at the potential forward inclusions and removals every month.
Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2023 based on trading data as of end-November 2022.

J Front Gets into Gaming to Drive Young Customers to Buildings

By Michael Causton

J Front has acquired a stake in an e-sports management business and will use this to target younger people, drawing them into its buildings through themed events.
Event marketing has become a key weapon for department stores and shopping buildings and should help bring in more young people.
J Front is also using technology to bring in more HNWIs – where the real profits lie.

Is TSE Being Too Strict with the Honor Students and Too Lenient with the Underdogs?

There are 236 companies with a trading unit of more than 500,000 yen, while there are 967 companies with a trading unit of less than 50,000 yen on the TSE.
It’s fair to amend the law to abolish the share unit system, but changing the law takes time. It’s also unclear why “between 50,000 yen and 500,000 yen” is appropriate.
While TSE still allows 300 companies that don’t meet the listing criteria to be listed on prime market, TSE requires companies with higher stock prices to increase their administrative burden.

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Nov 28

Daily Brief Japan: Nomura Research Institute Ltd, Kakaku.com Inc, Electric Power Development C and more

In today’s briefing:

Nomura Research Institute (4307) Large Secondary Offering – Demand Profile and Index Implications
Kakaku.com Inc.: A Deep-Dive View
2023 High Conviction: J-Power Stands Out As Japan Goes Carbon Neutral
Nomura Research Placement – Somewhat Well Flagged, past Deals Have Done Well but Momentum Is Weak

Nomura Research Institute (4307) Large Secondary Offering – Demand Profile and Index Implications

On Friday, Nomura Research Institute Ltd (4307 JP) announced that Jafco Co Ltd (8595 JP) and Nomura Holdings (8604 JP) would each sell NRI shares in a Secondary Offering.
JAFCO is selling to fund a giant buyback. Nomura is selling to round out the offering size. The total is 37mm shares plus greenshoe of 5.5mm shares.
At Friday’s price that is ~¥140bn (including greenshoe), 7% of shares out, 10% of float, and about 25% of Real World Float. There are index implications.

Kakaku.com Inc.: A Deep-Dive View

By Steven Chen

Kakaku.com Inc. can be a rare species among listed companies in Japan;
We had multiple email exchanges and meetings with the management team for a deep-dive view covering corporate cultural, management style, capital allocation, business model, and competitive strength.
We would wait for a 20%-30% pullback in the share price before looking to add to our position but would certainly remain reluctant to sell any share that we own.

2023 High Conviction: J-Power Stands Out As Japan Goes Carbon Neutral

By Oshadhi Kumarasiri

Operating under the brand name J-Power, Electric Power Development C (9513 JP) is leading Japan’s efforts to make carbon dioxide-free electricity by 2050.
The company’s investments in gasification and carbon dioxide separation technology and carbon dioxide-free hydrogen generation from coal are close to commercialisation.
With the technology to serve other power producers to develop their own environmentally-friendly power projects, J-Power could turn into a global-leader in the power generation space in the next decade.

Nomura Research Placement – Somewhat Well Flagged, past Deals Have Done Well but Momentum Is Weak

By Sumeet Singh

Nomura Holdings (8604 JP) and Jafco Co Ltd (8595 JP) are looking to raise around US$850m via selling 5.7% of Nomura Research Institute Ltd (4307 JP).
This is not the first sale by Nomura and marks a clean up for Jafco. Hence it might not come as a complete surprise.
In this note, we will run the deal through our ECM framework and talk about the recent updates.

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Nov 27

Daily Brief Japan: Jafco Co Ltd, Socionext, Nitori Holdings, Shionogi & Co and more

In today’s briefing:

JAFCO (8595) Yields to Murakami Greenmail – Big Asset Sale, Big Buyback
Socionext (6526 JP) TOPIX Inclusion – Great Performer Deserves Profit-Taking
Nitori Retreats from the US but Gets Muscular in Japan and Asia
Shionogi & Co (4507 JP): Oral COVID-19 Drug Got Approval; Files Approval for COVID-19 Vaccine

JAFCO (8595) Yields to Murakami Greenmail – Big Asset Sale, Big Buyback

Jafco Co Ltd (8595 JP) has long been known as a “cheap” listed “venture fund” because of its additional large (for it) holding in Nomura Research Institute Ltd (4307 JP).
Well-Known Japanese activist Yoshiaki MURAKAMI and his related companies bought a stake. JAFCO responded with a “Policy” (poison pill). Murakami-san ducked and dodged then bought more. Now the exit.
JAFCO will sell its Nomura Research shares in a Secondary Offering, and conduct a large buyback via tender offer. Like other Murakami exits, this one is not designed for you.

Socionext (6526 JP) TOPIX Inclusion – Great Performer Deserves Profit-Taking

Socionext (6526 JP) was offered in a range of ¥3,480-3,650, oversubscribed, IPOed at ¥3,650 and closed ¥4200 on Day 1. We can assume that was the “right price.”
Since then, while peers are up 19.8% in the 6 weeks since then, Socionext is up 66%. This year’s biggest Japan IPO has been a big winner.
The TOPIX inclusion is on Tuesday at the close. Beware, you don’t know who is in the stock and who is not.

Nitori Retreats from the US but Gets Muscular in Japan and Asia

By Michael Causton

Nitori is one of few Japanese retailers to brave the US market. The US has beaten Nitori for now and it will instead focus on Japan and Asia.
Nitori’s ability to leverage its efficient supply chains to lower prices will likely lead it to further dominance at home and allow it to invest in the rest of Asia.
The company expects pressures on costs to ease in 2023 as the Yen rises but is working on reducing the cost of goods and operations.

Shionogi & Co (4507 JP): Oral COVID-19 Drug Got Approval; Files Approval for COVID-19 Vaccine

By Tina Banerjee

On November 22, Shionogi & Co (4507 JP) received emergency regulatory approval for Xocova in Japan for COVID-19. It is Japan’s first homegrown oral antiviral for SARS-CoV-2 infection.
On November 24, Shionogi has filed for manufacturing and sales approval of S-268019, a recombinant protein-based preventive vaccine, for use in priming and booster (third) doses, against COVID-19.
Although Shionogi continues to expect ¥110 billion revenue from COVID-19-related products in FY23, the company has raised overall revenue guidance to ¥410 billion from ¥400 billion.

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Nov 26

Daily Brief Japan: Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

High Cost of TOPIX, Which Currently Contains Illiquid Stocks, Is Considered to Be Borne by Users

High Cost of TOPIX, Which Currently Contains Illiquid Stocks, Is Considered to Be Borne by Users

It’s unclear whether the stocks that lost ％ TOPIX had been overpriced or whether selling pressure caused temporary underperformance. However, it’s clear these illiquid stocks are unsuitable for institutional investors.
While users want TOPIX liquidity to increase, TSE insists on aligning its criteria for TOPIX stock selection with prime market listing criteria, which takes precedence over the interests of users.
Rather than asking these companies to take on daunting task of dramatically raising both profit margins and growth, TSE should bring TOPIX criteria to threshold that institutional investors invest in.

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Nov 25

Daily Brief Japan: Lockon Co Ltd, Suzuki Motor, Shiseido Company, Skymark Airlines and more

In today’s briefing:

Meituan Index Flows Clarifications on the Tencent Distribution; Prosus Comments on Its Holdings
Suzuki (7269 JT) | Ex-Maruti Valuation Now NEGATIVE
Shiseido: International Cosmetics Brands Sent Packing by Chinese Rivals
Skymark IPO – Ready For Takeoff

Meituan Index Flows Clarifications on the Tencent Distribution; Prosus Comments on Its Holdings

Days after the Tencent (700 HK) announcement about its planned distribution of the bulk of the Meituan (3690 HK) shares it owns, the Hang Seng Index team clarified index treatment.
It will be treated in HS Indices as a “listed non-cash distribution” for Tencent. There is theoretically wiggle room on the Meituan side, but it appears it will follow JD.com.
That means Meituan selling on 4 January at the close, limbo for two months, then Meituan buying. Full model below.

Suzuki (7269 JT) | Ex-Maruti Valuation Now NEGATIVE

By Mark Chadwick

Suzuki is our top pick in the auto sector in Japan as a key beneficiary of strong demand for autos in India
Suzuki reported better-than-expected 2Q earnings – but the stock price has not reacted
Suzuki remains mispriced. Suzuki’s market cap is negative if we strip out the value of Maruti

Shiseido: International Cosmetics Brands Sent Packing by Chinese Rivals

By Oshadhi Kumarasiri

The success of domestic brands in the low-cost cosmetics segment seems to be cascading into mid and high-price segments within the Chinese cosmetics market.
This could be bad news for Shiseido Company (4911 JP), whose investors are expecting the company to maintain its historical superiority in the Chinese cosmetics market.
We think that there’s a good chance for FY+2 EV/OP to return to the 12-20x range once the market price-in Shiseido’s weakening competitive position in the mainland China market.

Skymark IPO – Ready For Takeoff

By Mio Kato

Skymark will be re-listing following a successful turnaround under the guidance of ANA and Integral.
Listing proceeds will mainly be directed towards improving the fuel efficiency of its fleet.
Skymark offers an attractive play on reopening in Japan as it is geared into the simpler domestic market where elevated cargo rates and revenue per passenger are not downside risks.

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Nov 24

Daily Brief Japan: Mori Trust Sogo Reit, Oriental Land, Workman Co Ltd, PHC Holdings, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Mori Trust Sogo – Mori Trust Hotel REIT Merger
Nikkei 225 Index Rebalance Preview (March): Three Potential Changes & Large Funding Trade
2023 High Conviction: Workman’s Cost Performance Will Beat the Competition
PHC Holdings (6523 JP): Strong H1 Result; FY23 Revenue Guidance Raised; Mid-Term Plans Revised
Without Disclosure and Ensuring Transparency, the Black Box on Compensation Will Increase

Mori Trust Sogo – Mori Trust Hotel REIT Merger

Yesterday, Mori Trust Sogo Reit (8961 JP) (MTR) and Mori Trust Hotel Reit (3478 JP) (MTH) announced a merger to be effective 1 March 2023. MTR will be the survivor.
The ratio is 1.00 : 0.92 MTR:MTH but MTR will conduct a 2:1 stock split on effective date to make it 1.00 : 1.84 to allow retail to continue holding.
This will effectively increase the size of MTR by 35%, and re-distributes earnings structure. There will be index consequences.

Nikkei 225 Index Rebalance Preview (March): Three Potential Changes & Large Funding Trade

By Brian Freitas

With just over two months left in the review period, we expect three changes to the Nikkei 225 (NKY INDEX) at the March rebalance.
Lasertec Corp (6920 JP), Oriental Land (4661 JP) and Renesas Electronics (6723 JP) could replace Toyobo Co Ltd (3101 JP), Nippon Light Metal (5703 JP) and Toho Zinc (5707 JP).
As with the last rebalance, there will be a large funding trade estimated at JPY 417bn. There are many stocks with over 0.5x ADV to sell.

2023 High Conviction: Workman’s Cost Performance Will Beat the Competition

By Michael Causton

Although spending on non-necessities withered from March 2020 onwards, some low-cost retailers of discretionary items continued to grow.
Workman’s mix of high cost performance and engagement with the ever more active outdoor market has, and will, support expansion, even if same-store sales growth has slowed.
Future category expansion will deliver higher same-store sales as well as top line growth. 1,500 stores (from 1,000) is certain but 2,000 is possible thanks to new categories like footwear.

PHC Holdings (6523 JP): Strong H1 Result; FY23 Revenue Guidance Raised; Mid-Term Plans Revised

By Tina Banerjee

PHC Holdings (6523 JP) has revised mid-term plan for FY23–26, targeting revenue of ¥420 billion in FY26, representing 5.4% CAGR. CGM will be one of the key growth engines.
During H1FY23, total revenue increased 3% y/y to ¥171 billion, mainly driven by a 3% growth in diabetes management business, which contributed 32% of total revenue.
In response to the recent depreciation of the Japanese yen, PHC has raised FY23 revenue guidance to ¥358 billion (+5% y/y) from ¥350 billion earlier.

Without Disclosure and Ensuring Transparency, the Black Box on Compensation Will Increase

Progress on ESG initiatives should be evaluated objectively. With insufficient transparency and disclosure of compensation, there is concern that incorporating ESG factors into compensation will further increase uncertainty.
Leadership is required for management to seek the evolution of essential initiatives so that ESG efforts don’t fall into “numbers matching” and not be intimidated by temporary setbacks or modifications.
There are the following unresolved issues: non-disclosure of individual director compensation, bias toward fixed compensation, opaque compensation formulas, and ensuring the independence of the Compensation Committee.

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Nov 23

Daily Brief Japan: Skymark Airlines, Tokyo Stock Exchange Tokyo Price Index Topix and more

In today’s briefing:

Skymark Airlines Pre-IPO – Highly Leveraged with a History of Bankruptcy
Should the 2022 Annual Meeting of Shareholders Be Regarded as Constant Progress?

Skymark Airlines Pre-IPO – Highly Leveraged with a History of Bankruptcy

By Ethan Aw

Skymark Airlines (9204 JP) is looking to raise approximately US$218m in its upcoming Japan IPO.
Skymark Airlines (SA) is a Japanese low-cost airline, being the third largest domestic airline according to the company. Unlike major airlines and other low-cost carriers, Skymark operates only domestic flights.
In this note, we talk about the company’s past performance.

Should the 2022 Annual Meeting of Shareholders Be Regarded as Constant Progress?

Early disclosure of convocation notices and the use of electronic voting platforms, as specified in Corporate Governance Code, and electronic voting, which reduces the companies’ administrative burden, have also progressed.
Although the provision of English-language convocation notices was included in the Corporate Governance Code, only a few companies still send all documents in English translation.
More than 10 years after the regulatory-changes, few companies still file their annual securities reports prior to AGMs. Few companies take such a proactive approach by changing their company workflow.

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Nov 22

Daily Brief Japan: Medley, AXXZIA Inc, SUMCO Corp, Japan Post Bank, Honda Motor, ARTERIA Networks Corp, Daiei Kankyo and more

In today’s briefing:

Medley (4480) – Move to Prime Means TOPIX Inclusion Next Month
AXXZIA (4936 JP) – TOPIX Inclusion Is Likely In February
Sumco (3436) | Bargain Basement
Japan Post Bank – Unrealized Gains Down 95%
Honda Motor ADR: Initiation of Coverage – Recent JVs & Key Drivers
Arteria Networks (Buy) – Q2 22 Results Reaction: Core Business Growth Intact
Daiei Kankyo Pre-IPO – Peer Comparison and Thoughts on Valuation

Medley (4480) – Move to Prime Means TOPIX Inclusion Next Month

A year ago, TSE Growth-listed Medley (4480 JP) said they would “make preparations” for a listing on TSE Prime. Last month, Janaghan Jeyakumar, CFA had it at “Almost Ready.”
Today they announced they would list on TSE Prime on 28 November which means a TOPIX Inclusion at end-December.
Shareholder structure and stock bias matter a lot in this case. It’s very much worth looking at the details.

AXXZIA (4936 JP) – TOPIX Inclusion Is Likely In February