Daily BriefsJapan

Japan: Softbank Group, Roland Corp, Koei Tecmo Holdings, Okamoto Industries, Tokyo Stock Exchange Tokyo Price Index Topix, Nidec Corp and more

In today’s briefing:

  • Softbank Group – China Has Just Blown a Hole in Vision Fund’s Rapid Listing Theme
  • JAPAN PASSIVE: Who Owns What 2021?
  • Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages
  • Koei Tecmo – Beats Consensus but Is That Enough?
  • Deep-Dive: Okamoto Industries (5122 JP)
  • Japan’s Governance: The Problem of Copy and Paste Allegations
  • Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing

Softbank Group – China Has Just Blown a Hole in Vision Fund’s Rapid Listing Theme

By Kirk Boodry

Softbank has been touting Vision Fund’s IPO flywheel for almost all of 2021 but expect that to fade as the reality of China’s crackdown sinks in. It’s stake in Didi is worth $8bn as of Friday down from $10.6bn invested at the parent and $12bn total whilst other recent IPOs (YMM -28% on 23 July, ZME -35%, DDL -8%) are also under pressure. The good news is Vision Fund China assets are <10% of total China exposure and Alibaba has been through the regulatory wringer already. That limits China downside but it does call into question Vision Fund hopes for valuation gains from liquidity events. There is a direct read across with Zuoyebang and VIPThink which are banned from going public whilst three of the largest private investments remaining in Vision Fund 1 (Bytedance, ele.me and Guazi) are likely to remain on the sidelines. We expect the holding company discount is likely to remain in the 44% range.


JAPAN PASSIVE: Who Owns What 2021?

By Travis Lundy

A few years ago I started this series, and I updated it last year. Since last year, it has been a top 10 insight in terms of views. 

I personally think it is important for investors of all types to understand WHO OWNS WHAT. 

Many fundamental investors are reticent to spend any time on this but there are many reasons why active investors in Japan should be interested in understanding the ownership and shareholder dynamics of passive investors in Japan.

Some of the places active investors will see their influence are:

  • Stories intermittently published about the BOJ’s presence in Japanese ETFs (especially the fact that it owns 85+% of the outstanding ETF market),
  • Relatively constant interest in Nikkei 225 rebalances like the one we saw in July 2020, which helped push up Japan Exchange Group (8697 JP) by 30+% from May to July, then helped it slide 13% in a week, or the changes in the Nikkei 225 review rules published earlier this year which may change what happens this September to a few large caps, and the announcement of the BOJ that it would no longer buy Nikkei 225 ETFs which started a long slide in Fast Retailing (9983 JP) shares against comps and the Nikkei itself. Long “held up” by ‘market inventory’ and Nikkei 225 ETF buying, when the BOJ stopped, it removed the cushion and existing inventory holders had to sell out. 
  • Then if you look at the shareholder structure of Fast Retailing today, you will see that it is STILL fundamentally a serious problem for large foreign active investors who would actually wish to take an active (but not activist) position. Real World Float on the stock is, by my calculation, less than 15% of shares outstanding. 
  • The relatively recent policy of increased stewardship regarding the passive management portion of the GPIF (the Government Pension Investment Fund) – an investing heavyweight in Japan.
  • The timing and quantum of after-event support or overhang on corporate actions such as buybacks, secondary offerings, primary offerings, mergers, etc. 
  • Index inclusions mean big flows. If you follow the insights on TOPIX Inclusions by Janaghan Jeyakumar, CFA and myself, you will often see big moves. Sometimes these stocks move 50% between when we write about them and when they go into the index. If you own them and are considering an exit, you need to know when to take profits, and the dynamic of the liquidity. If you are thinking about getting in for fundamental reasons, it pays to know early so you can get ahead of the major flow.
  • The return of Toshiba Corp (6502 JP) to the TSE First Section in Q1 this year changed the foreign shareholder percentage ownership, lowering it by 10%. Smartkarma readers knew this last year and in January, which prepared them for the June AGM when the shareholder category ownership was released.
  • The changes to the TSE’s market structure, which will affect TOPIX membership, which will affect many companies’ issuance, buyback, share cancellation, etc decisions over the next several months. They are doing this because of the TSE Prime listing rules which will effectively also determine whether or not they will be included in TOPIX in future, or whether they will fall out of TSE Prime and will see constant selling over late 2022 to early 2025. 

Of course, TOPIX is just over half of the passive tracking AUM in Japan. There’s more. 

Find out WHO OWNS WHAT in Japan Passive below the fold. 


Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages

By Oshadhi Kumarasiri

Roland Corp (7944 JP), a global leader in the electronic musical instruments industry, has been shifting production away from China and Japan to concentrate most of the production activities to the Malaysian plant established in 2014 as a part of the business turnaround process that followed a vicious downward spiral in the post-global financial crisis (GFC) environment.

While demand for musical instruments soars across the world, COVID-19 lockdowns in Malaysia continues to affect Roland’s production capabilities. We believe Roland may fail to meet demand amidst disruptions to the main production facility in Malaysia while Yamaha Corp (7951 JP) seems to be well placed to outperform the market through capturing Roland’s lost demand.


Koei Tecmo – Beats Consensus but Is That Enough?

By Mio Kato

Koei Tecmo posted some stellar results today with ¥20.5bn in revenue (consensus ¥14.5) and OP of ¥9.7bn (consensus ¥5.9bn), putting the company on track to hit our ¥34-39bn FY OP target vs. consensus at ¥28.5bn. ¥8.7bn in income below the OP line was also a notable positive surprise thanks to strong investment income. How much of this is priced in though?


Deep-Dive: Okamoto Industries (5122 JP)

By Michael Fritzell

Okamoto (5122 JP) is a family-run household products and industrial materials company based in Japan.

The company is best known for its condom business, which ranks as the #3 globally. The brand name is strong in Asia, where Okamoto dominates the premium segment. The operating margin for Okamoto’s condom business is around 30%, and it has a clear technological leadership that protects it from the competition.


Japan’s Governance: The Problem of Copy and Paste Allegations

By Aki Matsumoto

In my previous article, “Human Rights Policy,” I discussed the fact that the management of TamaHome (1419) has acted and behaved in a manner that is inconsistent with respect for human rights and is not in line with the “Human Rights Policy” posted on the company’s website. It is not uncommon for Japanese companies to put too much emphasis on formalities and not enough on actual actions. I often see allegations of copy and paste in the corporate governance reports that the Tokyo Stock Exchange requires listed companies to submit.


Nidec (6594 JP): Good 1Q, but EV Motors Face Tough Competition and Severe Pricing

By Scott Foster

Nidec’s share price jumped 2.4% to ¥1,300 on Wednesday, July 21 – the last trading day before Japan’s national holidays, when the company announced results for 1Q of FY Mar-22 – but fell back 3.2% to ¥12,580 today.

This reflects the positives and negatives facing the company as it ramps up production of EV motors and drive systems.

Results for the three months to June looked good, with operating profit up 60% year-on-year on a 33% increase in sales. 1Q sales, operating profit and net profit were all about 56% of 1H guidance.

On top of that, Nidec and Hon Hai announced plans to establish a joint venture to develop Nidec E-axle traction motor systems for EVs made by Hon Hai subsidiary Foxtron Vehicle Technologies.

However, competitor Hitachi (6501 JP) announced plans to build EV component factories in Japan China and the U.S. to expand capacity by about 6 times; and price competition in China is severe.

At 53x management’s EPS guidance and 50x our own EPS estimate for FY Mar-22, and 40x our estimate for FY Mar-24, a lot of potential growth is already in the price.

We reiterate our previous conclusion: Guidance is probably conservative, but the shares are still overvalued.


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