Japan

• Quiddity’s “Who is Ready” series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
• There were no Section Transfers announced in January or February so currently there are no live TOPIX Inclusion events but there are some pre-event names to be monitored closely.
• The upcoming TOPIX flows in end-April 2024 will be more complicated than the other quarterly rebalances as there will be more flows due to the annual liquidity factor review.

• The current “higher for longer” interest rates in the US and other developed markets adds to the Bank of Japan potentially ending its negative interest rate policy
• Domestically, news reports suggest that the BoJ’s 2% inflation target is increasingly likely to be met in the short term, which further drives the potential normalization of interest rate policy
• Growing expectation of the BoJ’s negative interest rate policy exit adds upside to Japanese bank shares, especially those geared into higher domestic interest rates; we like Resona, Mizuho and Concordia

• TSE wants to make disclosure of financial statements in English mandatory, which many prime market companies do, and to require disclosure in both Japanese and English on the same day.
• The focus will be on expanding to English-language disclosure of documents such as annual securities reports and corporate governance reports, which are in high demand by overseas investors.
• Inadequate English-language disclosure has directly affected listed companies by preventing IR meetings from deepening dialogue and negatively impacting investment decisions.

• The changes to the Nikkei 225 Average for the March 2024 Review were announced today after the close. A little earlier than I expected. 
• Socionext, Disco, Zozo IN; Takara Hldgs, Sumi Osaka Cement, Pacific Metals OUT. Nitori PAF increase. US$4bn+ to trade one way on 29Mar close. One interesting surprise. 
• Overall more impactful than it looks. And it changes the front-end arithmetic on Fast Retailing (9983 JP). There may be fun on the DELETEs.

• JSR Corp (4185 JP)’s shares rose 4.8% due to a Nikkan Kogyo article that states that JIC will start the tender within the month due to concluding negotiations with SAMR. 
• Caution is warranted as JSR has not provided a customary timeline update, no confirmatory disclosure from SAMR and JSR’s response to SUNY RF’s claims are yet to be filed.
• Based on current information, there are five possible tender scenarios. In the worst case, the downside risk on a deal break should be muted due to the market re-rating. 

• DISCO (6146 JP), Socionext (6526 JP) and ZOZO (3092 JP) will replace Takara Holdings (2531 JP), Sumitomo Osaka Cement (5232 JP) and Pacific Metals (5541 JP) in the Nikkei 225.
• Nitori Holdings (9843 JP)‘s PAF will increase from 0.3 to 0.5, and surprisingly there is no PAF adjustment for ZOZO Inc (3092 JP). 
• Passive trackers need to buy between 1-18 days of ADV on the adds while selling between 2.7-28 days of ADV on the deletes. There is a big funding trade too.

• Trial Holdings (5882 JP) (TH) is now looking to raise up to US$259m in its Japan IPO, after having canceled its prior listing attempt last year.
• TH operates a network of retail stores that offer one-stop shopping under its everyday low price model, across a variety of daily necessities, food items and other products.
• We have looked at the company’s past performance in our previous notes. In this note, we talk about implied valuations in the IPO range.

• Sanyo Trading (3176 JP) is a small specialised trading company (rubber, polymers, elastomers, etc). Niche, decent profitability/margins, highish ROE.
• Banks in the MUFG and SMBC family are selling. Norinchukin is selling a bit too. 
• This is small in size but big in impact. 20% of Max RWF. 50d ADV. Unlike other recent, larger, offerings, this has no flow mitigants. But it’s cheap.

• Takamiya announced its 3Q FY24/3 consolidated sales of ¥32,183 mn (+4.9% YoY), operating profit of ¥2,405 mn (+49.7% YoY), ordinary profit of ¥2,526 mn (+46.5% YoY), and profit attributable to owners of parent (hereafter, net profit) of ¥1,727 mn (+46.9% YoY).
• All the segments, sales business, rental business and overseas business, posted an increase in operating profit YoY.
• Especially, rental business became a driving force of the expansion of the whole business. 

• For years I have tracked investor category flows in Japanese stocks because I find them quite informative. I write about them every so often in an insight series JAPAN FLOW.
• The series, which I have written about for years, suggests foreign investors invest in Japan pro-cyclically and that correlates well to One (relatively) Simple Indicator.
• Foreigners have a lot of ammunition left. But cross-holding unwinds are picking up, and buybacks are too, and dividend reinvestments are smaller than public pension selling. Which way next?

• Trial Holdings (5882 JP), a discount store operator in Japan, is seeking to raise US$236 million at the IPO reference price of JPY1,550 per share.
• We previously discussed the IPO in Trial Holdings IPO: The Investment Case. 
• In this note, we discuss valuation. Our analysis suggests that Trial is attractively valued at the IPO reference price of JPY1,550. We would participate in the IPO.

• We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads: APM Human Services Internation (APM AU), Probiotec Ltd (PBP AU), Alumina Ltd (AWC AU), Shinko Electric Industries (6967 JP), JSR Corp (4185 JP), China TCM.
• Lowest spreads: Tietto Minerals Ltd (TIE AU), Orecorp Ltd (ORR AU), CPMC Holdings (906 HK), Pact Group Holdings (PGH AU), Yaizu Suisankagaku Industry (2812 JP).       

• A group of shareholders are looking to raise US$220m from selling their stakes in Nippon Express Holdings (9147 JP).
• Overall, the deal would be a relatively large one to digest at 11 days of Nippon Express’ three month ADV, and 4.8% of the firm’s total shares outstanding.
• Together with the announcement, the firm has also guided towards a share buyback program which should provide some share price support a month post-deal,  in our view.

• About half of the prime market companies were able to communicate to investors that they are aware of their cost of capital and are committed to share price conscious management.
• Half of the companies are reluctant to engage in constructive dialogue with investors, sustainable growth and medium-to-long-term improvement of corporate value, which is the concept of prime market listing criteria.
• A quarter of prime market listed companies disclosed in English. Since TSE requires disclosure of this information in Corporate Governance Report, disclosure in English of this document becomes more important.

• A weekly summary of key developments across ECM and Event-Driven names tracked by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Thailand, Korea, India and Chinese ADRs.
• ECM developments: Toei Animation (4816 JP)‘s prices its US$550 million secondary offering and Trial Holdings (5882 JP) IPO.
• Event-Driven developments: Aozora Bank Ltd (8304 JP), Outsourcing Inc (2427 JP), Tsuruha Holdings (3391 JP), Samsonite (1910 HK), Alumina Ltd (AWC AU), APM Human Services Internation (APM AU). 

• Apart from being mildly EPS accretive, Keisei Electric Railway Co (9009 JP)‘s buyback is a means to get crossholders out, therefore, it may not have much direct market impact. 
• Cie De Saint-Gobain (SGO FP) firms a decade-high-plus Offer price for CSR Ltd (CSR AU) – this is done.
• Rakuten Group (4755 JP) announced it would propose an amendment to its Articles at the AGM (28 March) to issue “Bond-Type Class Shares.” First reaction: You wot, mate?

• Nippon Express Holdings (9147 JP) has announced a secondary offering of up to 4.8 million shares (including overallotment). There are seven selling shareholders.
• The secondary offering comes ahead of the implementation of regulatory restrictions on truck drivers’ overtime in April 2024, which is widely known as the ‘2024 Problem’.
• Looking at recent large Japanese placements is instructive for understanding the potential offer price. The pricing date will likely fall between 11 and 13 March (likely 11 March).

• Today post-close, Nippon Express Holdings (9147 JP) announced a secondary offering. Total size is ~¥30bn before considering where it will price; 11-12 days of ADV, 4.6% of shares out.
• Various banks, Toyota-related auto cos, and Sompo Japan will sell. This is a start to the unwind, but it is a very small portion of the total cross-holding position. 
• NX also announced an on-market  buyback of up to ¥10bn to run from 11April -31July 2024. This, and index demand, mitigate some heaviness. But The 2024 Problem looms large.

• With IPOs becoming a place for founders to recoup their capital, and the desire for post-IPO growth declining, IPOs are a place for retail investors to speculate using scarce liquidity.
• If a market is provided that recovers funds without relying on IPOs, IPOs will become larger and more selective, which brings them closer to the investment focus of institutional investors.
• The expansion of the private equity market will play a significant role in the “industry restructuring,” as more M＆As between private companies and public companies are expected to take place.

• We continue to see more and more global indexes and Sectors breaking out to new highs. This is classic bull market behavior. The latest breakouts: Israel, Germany, and Sweden
• Our bullish outlook (since early November 2023) on global equities (MSCI ACWI) remains intact; continue to ride this trend higher, and treat pullbacks as buying opportunities.
• We continue to get more evidence suggesting the US Dollar (DXY) is rolling over, and quite likely that global sovereign 10-year yields are rolling over as well. Risk-on.

• The Tokyo Stock Exchange (TSE) calculates Free-Float Weight (FFW) for each listed company and uses this value as a key component of TOPIX Index Calculation.
• For companies with “low liquidity” the FFW will be multiplied by a fixed liquidity factor of 0.75 to derive the final FFW used for index calculation.
• Every April, the application of this liquidity factor is reviewed by the TSE. In this insight, we take an early look at what could happen in April 2024.

• Last October, I wrote about the plan the sponsor of Sankei Real Estate (2972 JP) had to exchange buildings with the REIT to clean it up, then buy more units.
• Today they announced the completion of the Portfolio Rebalancing Plan started in March 2023. And the plan to buy more units. The assets transferred out were gone at end Jan-2024.
• Now that’s done, and there are units to buy. Maximum 46,652 units over maximum 220 days.

• Teikoku, a stable disaster equipment leader, is undervalued due to excessive cash and cross-holdings.  
• Regulatory pressure, industry trends, and potential Hulic asset sales create an opportunity to unlock hidden value.
• Despite fair current pricing, potential share repurchases and improved capital allocation offer up to 40% upside.

• For the month of February 2024, 15 new transactions (firm and non-binding) were discussed on Smartkarma with an overall announced deal size of ~US$20bn.
• The average premium for the new transactions announced (or first discussed) in February was ~33%.
• This compares to the average premium for transactions in 2023 (117 transactions), 2022 (106), 2021 (165), 2020 (158), and 2019 (145 ) of 39%, 41%, 33%, 31%, and 31% respectively.

• On the surface, FY23/12 consolidated OP -68% YoY, profit ATOP -53%, and FY24/12 initial guidance for a profit ATOP net loss may appear to indicate a challenging earnings environment.
• However, closer examination reveals steady earnings improvement, and the new MTP through FY26/12 targets recouping major overseas growth investments.
• The table below shows sequential improvement in the amount change YoY for Group EBITDA, OP and profit ATOP every quarter, with profits at all 9 levels posting YoY gains in the 4Q. 

• 3Q Earnings Summary: In cumulative 3Q FY2024/3, Japan System Techniques recorded net sales of ¥18,527 mn (+11.4% YoY), operating profit of ¥1,614 mn (+3.5% YoY), ordinary profit of ¥1,648 mn (+2.7% YoY), and profit attributable to owners of parent (hereinafter, net profit) of ¥1,099 mn (-5.8% YoY).
• Cumulative 3Q sales, operating profit, and ordinary profit came in at record highs.
• Operating profit growth fell short of sales growth owing to planned increases in upfront investments for personnel expansion, education and training expenses, and IT infrastructure enhancements.

• Today after the close, Mitsubishi Electric (6503 JP) announced the sale of its position in Renesas Electronics (6723 JP). That’s 50,706,800 shares.  
• This is the third large block in four months (Renesas in November for 223mm shares, NEC and Hitachi in January 2024 for 123mm shares).
• This is smaller, and reasonably well-flagged. Index demand is longer-dated.

• The first piece had a question mark in the title. This one has an exclamation point. The exclamation point has value for one investor. Other people? Not so much.
• Today post-close we got the deal. I was a little surprised it came this fast, but it’s now mostly done it appears – largely as predicted in the last piece.
• There are things one can probably read into the details. It is probably worth thinking about those, and how those details affect the industry. 

• Japan’s Nikkei Stock Average has surged past its 1989 peak, fueled by global investor interest, corporate reforms, and innovative investment initiatives like the Nippon Individual Savings Account (NISA).
• This resurgence marks a significant milestone in Japan’s economic landscape, reflecting renewed investor confidence, structural reforms, and potential growth opportunities in the market.
• The Nikkei’s surpassing of its previous peak signals a shift in perception towards Japan’s market potential, prompting investors to reconsider the country’s economic trajectory and explore new avenues for investment.

• Murakami’s entity, City Index Eleventh, reported a 5.42% shareholding in Aozora Bank Ltd (8304 JP). Murakami started buying a day after the disastrous 3QFY23 results.
• Murakami’s average buy-in price is JPY2,137.88 per share, a 34% discount to the pre-3QFY23 results share price. 
• Murakami’s disclosure suggests two possibilities: the start of an activist campaign or a short-term trading play replicating the Pacific Metals (5541 JP) playbook.

• Yesterday after the close, well-known Japanese activist Murakami-san’s preferred entity City Index Eleventh filed a Large Shareholder Report. 
• The blast across Bloomberg was “*AOZORA 5.4% STAKE REPORTED BY CITY INDEX ELEVENTH.” Sounds exciting after the shares dropped 34% in two days earlier this month after reporting big writedowns. 
• But there has to be a question here. Why? And Why this way? And what kind of activism would be possible? 

• Mitsubishi Electric (6503 JP) is looking to raise approximately US$800m through an accelerated secondary block deal, via selling 50.71m shares (2.6% of TSO) of Renesas Electronics (6723 JP) stock. 
• The deal will be an easy one to digest at only three days of three month ADV.
• In this note, we will talk about the placement and run the deal through our ECM framework.

• Aeon Co Ltd (8267 JP), Tsuruha Holdings (3391 JP) and Welcia Holdings (3141 JP) have announced an alliance to establish the largest drugstore alliance in Japan by December 2027.
• Aeon will carry out several Tsuruha transactions – buy Oasis 13.58% stake at JPY15,500 per share and, on receiving regulatory approval, reach 27.17% of the voting rights.  
• The agreements involve merging Tsuruha and Welcia through a share exchange offer and Aeon subsequently increasing its Tsuruha voting rights from 27.17% to less than 51%. 

• 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 rankings of the potential ADDs/DELs every month.
• Below is a look at potential ADDs/DELs for the JPX-Nikkei 400 index rebal event to come in August 2024 based on trading data as of end-February 2024.

• Aeon will almost definitely increase its stake in Tsuruha Holdings, which on its own will catalyse drugstore competitors to consider their mergeable options.
• Tsuruha MAY merge with Welcia under Aeon and just talk of this will catalyse drugstore competitors even more.
• But the ongoing fusion of drugstore retailing and FMCG formats like supermarkets and convenience stores, will also spur the entire FMCG sector to respond to Aeon’s massive potential dominance.

• Tokyo Metro (TKYMETRO JP)’s shareholders, the Japanese and Tokyo Metropolitan Governments, could look to raise up to US$2bn by selling half of their stake via an IPO.
• Tokyo Metro is one of the two metro network operators in the Tokyo region. It operates nine subway lines.
• In this note, we take an early look at the possible listing.

• On 14 February, Sony Corp (6758 JP) and Bandai Namco Holdings (7832 JP) announced an equity offering of nearly 4.5mm shares of Toei Animation (4816 JP). 
• Float on Toei Animation (4816 JP) has been low. This would raise it to meet the minimum standard to stay listed on the TSE Standard market section.
• To get to TSE Prime, it needs another offering. And there are lots of cross-holders to go.

• Today, Rakuten Group (4755 JP) announced it would propose an amendment to its Articles at the AGM (28 March) to issue “Bond-Type Class Shares.”   First reaction: You wot, mate?
• The company states it wants to “strengthen its financial base through reducing interesting-bearing debt by equity-related financings and conduct proactive control of debt maturity schedule, etc.”
• Now it wants to issue listed bond-type shares. Dividends not interest. The last Japanese issuer of something similar was NEC in 2001. Few will remember, so we study the situation.

• After an extension due to a European Foreign Subsidies Review filing, and a small ‘accident’ regarding the earnings release, we have a deal. 
• The earnings release itself seemed more innocuous than articles and rumour suggested show the causes of impairments and so it seemed like there was little cause to walk/declare MAC.
• Now it will be done in 20 days. I still think this is cheeky, opportunistic, and low, and it is up to the float to decide what to do.

• Outsourcing Inc (2427 JP) announced that the pre-condition was satisfied, and Bain’s tender offer remains unchanged at JPY1,755 per share, a 52.1% premium to the undisturbed (8 December).
• Shareholders will breathe a sigh of relief as the weak 4Q and significant impairments have raised concerns that Bain would cut its offer or walk away.
• The offer attractiveness has increased partly due to lower consensus. At the last close and for a 3 April payment, the gross/annualised spread is 2.0%/22.8%.

• Restrictions on driver overtime due in April are forcing logistics rationalisation across supply chains.
• Aeon is one of the few retailers that runs its own logistics platforms but, even so, changes to logistics practices will feed through to how stores are merchandised
• This could result in competitive pressure on smaller supermarket chains.

• Olympus Corp (7733 JP) announced disappointing Q3FY24 result. Although revenue increased 7% YoY to ¥239B, beating estimate of ¥236B, operating profit declined 30% YoY to ¥34B, below estimate of ¥43B.
• The company cut FY24 operating profit guidance for second time and reduced revenue guidance after raising it in November. Noto Peninsula earthquake is the main reason for reducing revenue guidance.
• Although both revenue and profits are expected to improve in FY25, it will be difficult to achieve an operating margin of 20% and sales growth of 5%.

• Over the weekend there was an article in the Nikkei saying that Tsuruha Holdings (3391 JP) and Welcia Holdings (3141 JP) were considering a merger. Other media outlets followed.
• This has been a possible outcome. Aeon Co Ltd (8267 JP) owns 51% of Welcia, 13.6% in Tsuruha, and is negotiating to buy another 13% in Tsuruha from Oasis.
• This would create a behemoth. ¥2.2trln in revenues vs ¥1trln for MatsukiyoCocokara (3088 JP). It would be 25% of the market. Questions will be asked about concentration. 

• The Rakuten Bank offering in early December was a great time to buy the dip of you sold end-September. It should have been a good time to buy outright.
• Unfortunately, the stock priced at ¥2,470, then closed that day at ¥2,500. That was the high for the next ten weeks. Two weeks later it was 20% lower. Ouch.
• But it climbed out of the abyss, gained 35% in 8wks, then Thursday the Bank announced a new Shareholder Benefit program. Today the stock was +7%. Worth looking at details.

• Since the US$550 million secondary placement announcement, Toei Animation (4816 JP)’s shares are down 7.0% from the undisturbed price of JPY18,560 per share (14 February).
• Looking at recent large Japanese placements is instructive to understand the potential trading pattern. So far, Toei Animation’s shares have followed the pattern of previous large placements.
• The offering will likely be priced on 27 February. Investors participating in previous large Japanese placements tend to secure positive returns.

• The possible merger between Welcia and Tsuruha under Aeon has been talked about for years despite concerns from both drugstores, but may now happen.
• But calling these retailers drugstores is increasingly a misnomer: FMCG-drugstores is better because they and many others in the sector, increasingly compete with FMCG retailers like supermarkets and even CVS.
• This evolution is rapid so the merits of a deal make more sense when we view it from a sector five years in the future than how it is today.

• Keisei Electric (9009 JP) has been an outperformer since activist fund Palliser Capital called on the company sell some Oriental Land (4661 JP) shares. It has now announced another buyback.
• Preceding my comments on Keisei Electric are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• Post FY23 results in mid-February, Appier’s stock exhibited significant volatility, despite robust financial performance.
• We believe that Appier is a beneficiary of continued growth in ecommerce and increasing ubiquity of AI solutions for marketing.  
• Appier trades at a significant discount to global peers and domestic SaaS companies, suggesting significant upside

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Rakuten Group

• CARTA HD strives to become “The Evolution Factory” and operates mainly in the digital marketing field.
• The company was established in January 2019 through the merger of the former VOYAGE Group, which had expanded earnings by creating a series of new businesses centered on the ad tech domain, and the former Cyber Communications, the largest media rep firm in Japan.
• CARTA HD holds a 3.9% share in the Japanese online advertising market.

• P/B’s slightly higher valuations in October 2023 while ROE, EPS, and BPS did not change much were due to external factors, not internal factors.
• Clearly, improvements in ROE and ROA are effective in improving stock valuations, but valuations have further increased for companies with higher valuations and profitability for the past year.
• Some of these companies have begun to use cash more effectively for investment and shareholder returns. The gap in market capitalization between these companies and the rest will increasingly widen.

• With an apparel business, product business, and transportation business, MORITO CO.‚ LTD., (Morito) conducts planning, development, and sales of products that reflect market needs and customer demands.
• The products it sells are either produced in house or purchased from suppliers.
• Handling an extremely diverse range of products that total more than 500 thousand, the company sells those products in niche markets.

• Keisei Electric Railway Co (9009 JP) has long been the target of activist-ish-y holders who seek to have the company monetise its 20+% stake in Oriental Land (4661 JP). 
• Last autumn (17-Oct-2023), Keisei was the subject of a presentation by activist-ish-y fund Palliser Capital who called the stock 43% undervalued. They want Keisei to sell some OLC shares.
• Palliser wanted Keisei to use resulting monies for growth capex+shareholder return, improve IR/governance, shrink board, adopt KPIs, etc. Thursday we got an announcement of a 2.9% stock buyback.