Daily BriefsJapan

Japan: Fanuc Corp, Nishimatsu Construction Co, Kirin Holdings, Sony Corp, Toshiba Corp, Demae-Can Co., Ltd. and more

In today’s briefing:

  • Fanuc – Could There Be a Shock Downgrade?
  • Nishimatsu Construction – Tender Completed, Overhang Commences
  • Kirin: Holdco Discount Could Unwind As Institutional Investors Return Following Myanmar JV Troubles
  • Sony – An Uncharted 4Q
  • Toshiba (6502 JP): Nanoimprint Litho Could Add Value to Kioxia, but Not Soon
  • Japan’s Governance: Equity Finance Update Demae-Can (2484) Vol.3

Fanuc – Could There Be a Shock Downgrade?

By Mio Kato

The FA sector has enjoyed a few strong quarters as COVID helped kickstart an earnings upcycle that was about due regardless. Despite this, stock prices have been flattish or weak for most names this year excluding the invincible Keyence. While peer Yaskawa upgraded its earnings guidance when it reported we have some concerns about Fanuc.

Nishimatsu Construction – Tender Completed, Overhang Commences

By Travis Lundy

One month ago, Nishimatsu Construction Co (1820 JP) launched a Tender Offer to buy back 27.42% of shares out in an Own Share Tender Offer. 

The primary goal, of course – as it often seems to be in own share tender offers in Japan which are conducted around market price – was to have the company rid itself of the Murakami-related shareholders while “returning capital to shareholders and raising ROE.”

They were aiming to buy back 15 million shares. They got offers to buy back 21.1 million shares. 

I discussed the situation in Nishimatsu Construction (1820) About to Do Its Last Buyback for a While, and You Can’t Participate! when it was announced. 

The deal was announced at a relatively high price – near a 20yr high – and the shares stayed in place during the deal. 

The results announced yesterday after the close were interesting. 

I had suggested that as many as 20.5mm shares could tender against the 15mm share buy. It turns out to have been 21.11mm shares tendered, which means that pro-ration was only 71%. 

The Deemed Dividend, which made this entire situation quasi un-investable for foreign shareholders, came out at ¥2,856.63 I am told (I had my ballpark guesstimate at ¥2,786-2,846 which is close enough for horseshoes and hand grenades and Deemed Dividend guesstimates).

And the results tell you some interesting things. More below.

Kirin: Holdco Discount Could Unwind As Institutional Investors Return Following Myanmar JV Troubles

By Oshadhi Kumarasiri

  • Kirin Holdings (2503 JP)’s share price has underperformed its peers, Asahi Group Holdings (2502 JP) and Sapporo Holdings (2501 JP) by 47.5% and 36.8% respectively during the last 10 months as big foreign funds such as Franklin Resources, Morgan Stanley and Canada Pension Plan Investment Board decided to trim their stakes, amidst human rights violation allegations regarding Kirin’s JV partner in Myanmar, Myanmar Economic Holdings (MEHL).
  • We expect Kirin to settle the matter with MEHL before February 2022. In addition, we expect the consumption of alcoholic beverages to increase following the complete removal of the state of emergency in Japan from the 1st of October 2021.
  • Meanwhile, institutional investors have started to increase their holdings over the last few months, perhaps in anticipation of a settlement for the Myanmar JV issues. We expect this change in investor sentiment to unwind Kirin’s holdco discount, which is currently at a multi-year low level.

Sony – An Uncharted 4Q

By Mio Kato

Sony’s execution on its IP cross selling continues to gather steam and the Jan-Mar quarter could see a slew of major titles releasing on PS5, some old favourites being released for PC to broaden the Playstation fanbase and a couple of blockbuster movies to boot.

Toshiba (6502 JP): Nanoimprint Litho Could Add Value to Kioxia, but Not Soon

By Scott Foster

In this morning’s news: “Merger talks between Western Digital and Kioxia stall” (Reuters, October 22, 2021, updated 9:07 a.m. JST). It is yet not clear how serious this might be.

On October 19, the Nikkei reported that Toshiba affiliate Kioxia, Canon (7751) and Dai Nippon Printing (7912) are aiming to use nanoimprint lithography in Kioxia’s NAND flash memory production in 2025.

The potential savings in terms of equipment and operational costs could be great enough to give Kioxia a competitive advantage. It would also justify years of development and give Canon and Dai Nippon Printing important new products.

But 2025 is a long time from now and technical hurdles remain. For the time being, more immediate issues are likely to move the stocks. 

LightStream’s Mio Kato continues to see upside potential for Toshiba, but primarily as an exit opportunity (see Toshiba – Possibility of a Kioxia-Western Digital Deal )

Japan’s Governance: Equity Finance Update Demae-Can (2484) Vol.3

By Aki Matsumoto

I would like to add a few things that I left out in my previous article “Equity Finance Update Demae-Can (2484) Vol.2”. Regarding the approximately 83 billion yen raised through equity finance, based on the plan in the disclosed information, the fund will be used mainly for marketing expenses, and the remaining 10 billion yen will be used for capital expenditures to enhance systems. The company said, “Even if we invest 40-50 billion yen in marketing expenses this fiscal year, we have 10 billion yen in cash on hand before the capital increase, so we will be able to invest the same amount in marketing expenses next fiscal year as we did this fiscal year, and there is no need for new equity financing. As for the outlook for the current fiscal year, the KPIs for GMV and active users were 330 billion yen (203% YoY) and 12 million users (163% YoY), respectively. As I mentioned in my previous article, after the analyst meeting, we were told that the company was expecting an operating loss of 50-55 billion yen for this fiscal year. After the analyst meeting, our stock price has continued to weaken. One of the reasons for this is that while the company announced that it would increase marketing costs this fiscal year, it did not provide a specific forecast for the convergence of these costs. The company plans to increase the ratio of GMV to advertising expenses, which accounts for the majority of marketing costs, from 9.1% in the previous fiscal year to the mid-10% range in the current fiscal year, but it has set that figure as a medium-term target of 2% or less. I suspect that many investors are concerned about the fact that the timing of the convergence of marketing costs is unclear.

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