Brief Japan: Nagoya Bank’s Biggish Buyback and more

In this briefing:

  1. Nagoya Bank’s Biggish Buyback
  2. Bank M&A in Asia – a Decade in Review
  3. Naver, SoftBank’s Savior Again? This Time with Coupang?
  4. VisasQ IPO – Nice Business but Too Much Growth Priced In

1. Nagoya Bank’s Biggish Buyback

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Bank Of Nagoya (8522 JP), regionally and colloquially known as “Meigin”, is a regional bank with a low ROE (3.3%) and a low PBR (0.3x) and a JPY 60bn market cap, which puts it squarely in the “too-small-to-be-a-big-regional-but-not-actually-really-small” category.

Like other regional banks, revenues, recurring profits, and net profits will be down this year. The recent Q3 report on 5 February provided for no change to full year forecasts. 

Today, the company announced (Japanese) that it would move to a corporate system of Board and Audit & Supervisory Committee. The Audit and Supervisory Committee will have a majority of outside directors. This is aimed at improving governance, and speeding up business decision-making at the board level. To make the change (which would generally be seen as a positive in governance terms) will require a change to the bank’s Articles of Incorporation. That will require approval at the AGM in June, after which the change would become effective. 

The OTHER NEW News

Today the bank also announced (Japanese) that it would buy back up to 700,000 shares for up to JPY 2.5bn. That is 3.72% of shares outstanding (less treasury shares). The period of the buyback is from 27 February to 27 March and it expects to buy back on-market, including through ToSTNeT-3 transactions. To be able to buy back all 700,000 shares would require that the purchase price be less than ¥3571/share (vs last traded price of ¥3285). 

The accompanying information is that the bank will cancel 1.5mm shares (Meigin already has 946,687 shares as treasury shares). 

Both bits – the buyback and the cancellation – tell you something.

This is worth a look for short-term traders.

2. Bank M&A in Asia – a Decade in Review

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Several countries are pushing for more M&A in Asian banking as a way to ameliorate risks (India) or to possibly compete more regionally (Malaysia), with even some rumours resurfacing of further activity in Australia. We have reviewed all major banking transactions in the Asia Pacific region over the past 10 years which involved consolidation and we summarise our findings below.

Summary findings

We find that most banks lose market share after a merger when we consider total assets.  This is usually due to depositors moving to reduce concentration risk and loan rationalisation by the merged entity. 

Overlapping banks allow for more synergies and there tends to be better performance, especially if management is able to achieve the synergistic gains quickly.  Mergers aimed more at revenue synergies or entering new markets appear to have lukewarm benefits.

A long drawn out merger process with unambitious long term synergistic benefits are penalised by markets.  Delays can be cultural, labour union led, government led or legal.

Clearly the lead in any transaction tends to impose their will on the combined entity.  We find that performance suggests that investors are better owing targets rather than acquirers.

3. Naver, SoftBank’s Savior Again? This Time with Coupang?

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Elliott left Korea, but it didn’t go very far. It chose Korea’s closest neighbor, Japan, as its next stop. It is now sitting on SoftBank Group with about a 3% stake. Elliott reportedly wants to see a vast improvement in SoftBank’s venture investment, the so-called Vision Fund. Well, it is quite understandable and no surprise. Then, what would be an immediate target? Again, unsurprisingly, it is Coupang that is in the limelight at this point. Korea’s local street is speculating that Elliott may single out Coupang as an exemplary target of its activism efforts.

Of course, we can not know what Elliott demands and how it will exercise its activism muscle on SoftBank and Coupang. It may or may not force SoftBank to completely get out of Coupang by selling off all of its stakes. But what at least seems inevitable is that Elliott will demand a quick and viable liquidation strategy. That is, SoftBank will likely find it extremely difficult to provide another massive capital injection into Coupang. Then, where does Coupang stand in terms of the money situation? Well, it is pretty bad and urgent. Last year again, it reportedly put up a ₩1.4tril operating loss.

It got about ₩2.3tril in 2018 from the Vision Fund, but out of that ₩2.3tril, it has already consumed nearly ₩1.4tril. The street estimation is, at the current pace of operating loss, Coupang will completely deplete its capital pool by the third quarter of this year. So, like it or not, SoftBank will have two options left, either say farewell or have it go public. Of course, neither option would be a walk in the park. Finding a buyer in the short-term for a company that is losing like US$1bil a year would be one hell of a job (although the local street speculates about Amazon being as a potential buyer). For a similar reason, IPO on either KOSPI or NASDAQ should also be a very challenging job.

So, SoftBank and Coupang need someone from outside for a makeup purpose. Realistically, that makeup would be for IPO. Then, who would that be? Well, the local street has been heavily speculating that Naver would take the role, yes again. We have seen at least three local news reports on the possibility since last December. Lately, a couple of the local brokerages have jumped in to argue on the likelihood of another SoftBank and Naver marriage.

4. VisasQ IPO – Nice Business but Too Much Growth Priced In

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VisasQ is a domestic Japanese expert network that seeks to list on the 10th of March with book building ending on the 27th of February. The company has demonstrated rapid growth but seeks a premium valuation at about 16.1-18.6x EV/Sales. We examine its prospects below.

VisasQ

 

Expected Listing Date

10 March 2020

Book Building Ends

27 February 2020

 

 

New Shares Offered

500,000

Existing Shares Offered

1,721,000

Overallotment

333,333

 

 

Expected Pricing

¥1,300-1,500

 

 

Implied Market Cap at Midpoint

¥11,925m

Source: Company disclosures, LSR

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