Japanese Turnaround Situations, Short-Ideas, Azabu Research

Michael Allen

Japanese Turnaround Situations, Short-Ideas

Azabu Research

Azabu Research is a publishing and consulting firm focused on distressed equities in the Japanese market. We specialize in turnaround strategies, corporate combinations, divestitures, and restructuring.

Publisher of the Tokyo Turnaround Letter, which conducts the most thorough research possible of publicly available information, including forensic tests for fraudulent overstatement of assets and understatement of liabilities, as well as rigorous market and industry analysis to assess the underlying strengths of the company’s products or services, the appropriateness of the company’s turnaround strategy, and the skill of its current management team. The average length of a report exceeds 25 pages of text and tables, excluding any disclosures or executive summaries.

We have more than 30 years of experience in applying this process to distressed equities in Japan. Additionally, subscribers have free access to detailed, yet easily navigated earnings models for the target company as well as the top five comparable companies, and unlimited access to the analyst for follow-up questions.

Azabu Research also conducts be-spoke research on a project basis, and provides consulting services to companies looking to restructure, divest, make acquisitions, go public, or improve investor sentiment toward their stock.

Independent Research and Consulting Firm

Thematic (Sector/Industry)

<ul>
<li>The median stock in our Dogs of Topix basket outperformed the median stock in the Topix 400 by 4% through Sept 2024.</li>
<li>This is below the average of 7% achieved by such stocks over the past 9 years, but it was a much tougher stretch than it looked. </li>
<li>Do we need to re-think? Much can be learned comparing the outperformers, whose median return was +34%, compared to the underperformers, which declined 23%.</li>
</ul>


The median stock in our Dogs of Topix basket outperformed the median stock in the Topix 400 by 4% through Sept 2024.
This is below the average of 7% achieved by such stocks over the past 9 years, but it was a much tougher stretch than it looked. 
Do we need to re-think? Much can be learned comparing the outperformers, whose median return was +34%, compared to the underperformers, which declined 23%.


Have the Rules for Bottom Fishing Changed?

Equity Bottom-Up

NEXTAGE Co., Ltd. operates a used automobile business. Its main line of business is retail of used domestic cars but it also sells imported cars and SUV/vans. In addition, the company also operates an automobile maintenace business.

<ul>
<li>Simply Wall Street published an article on Aug 20, 2024, suggesting the fair value of Nextage was ¥1,772 or 16% below the previous day's closing price.</li>
<li>Yet, on the Simply Wall Street website’s stock page for Nextage, updated on August 26, they calculate the fair value at ¥5,726, or 189% above the close on Aug 19.</li>
<li>Both cannot be right. Here's an interesting window into how markets mis-price stocks.</li>
</ul>


Simply Wall Street published an article on Aug 20, 2024, suggesting the fair value of Nextage was ¥1,772 or 16% below the previous day's closing price.
Yet, on the Simply Wall Street website’s stock page for Nextage, updated on August 26, they calculate the fair value at ¥5,726, or 189% above the close on Aug 19.
Both cannot be right. Here's an interesting window into how markets mis-price stocks.


Nextage (3186): One Analyst, Two Valuations, Both Wrong

SHIFT Inc. offers information technology outsourcing services. The Company provides outsourcing software testing services to corporations and individual clients. SHIFT also provides software solutions and consulting services, as well as educational classes and programs.

<ul>
<li>A massive shortage of IT professionals combined with Shift's overwhelming dominance of the labor market should drive 20% annual revenue growth through 2030. </li>
<li>But Shift missed consensus profitability estimates 3 consecutive quarters, and the share price is down 67% in 12 months, compared to an 18% rise in the median peer. </li>
<li>In our view, a recovery in profitability is already underway, and shares are at least 45% undervalued</li>
</ul>


A massive shortage of IT professionals combined with Shift's overwhelming dominance of the labor market should drive 20% annual revenue growth through 2030. 
But Shift missed consensus profitability estimates 3 consecutive quarters, and the share price is down 67% in 12 months, compared to an 18% rise in the median peer. 
In our view, a recovery in profitability is already underway, and shares are at least 45% undervalued


Shift (3697): Profitability Rebound Underway

ROHM COMPANY LIMITED manufactures custom linear integrated circuits and semiconductor devices for use primarily in consumer electronics.  The Company has plants and sales offices worldwide.  Rohm's subsidiaries include Wako Electric and Apollo Electronics.

<ul>
<li>Rohm’s cyclical turning points in revenue typically lag the turn METI production %YoY less inventory % YoY for electronic devices and components by 12 months.</li>
<li>Investors were disappointed with Q1 results, but the company cleanly outperformed most peers in the power semiconductor space, and recovery now looks inevitable. </li>
<li>We believe the fair value of shares to be around ¥3,300, 2x the current price, but investors should ask, “When?” Not “How much.”</li>
</ul>


Rohm’s cyclical turning points in revenue typically lag the turn METI production %YoY less inventory % YoY for electronic devices and components by 12 months.
Investors were disappointed with Q1 results, but the company cleanly outperformed most peers in the power semiconductor space, and recovery now looks inevitable. 
We believe the fair value of shares to be around ¥3,300, 2x the current price, but investors should ask, “When?” Not “How much.”


<ul>
<li>NextAge has, in just two short years, moved from number 3 to number 1 in the used car market in Japan. </li>
<li>It’s market share is still less than 7% and we no longer see any meaningful obstacle in the company’s path to 30% share within the next 8 years. </li>
<li>The stock underperformed Topix by 59% following a series of earnings misses, but we think all issues have been resolved. Fair value could be 3x the current price.</li>
</ul>


NextAge has, in just two short years, moved from number 3 to number 1 in the used car market in Japan. 
It’s market share is still less than 7% and we no longer see any meaningful obstacle in the company’s path to 30% share within the next 8 years. 
The stock underperformed Topix by 59% following a series of earnings misses, but we think all issues have been resolved. Fair value could be 3x the current price.


NextAge (3186):  Disruptive Business Model at Massive Discount

Michael Allen is a representative director of Azabu Research, an independent research company focused on turnaround situations in the Japanese stock market. He has covered Japanese stocks for more than 30 years in both sell-side and buy-side roles and is fluent in both written and spoken Japanese.  He holds a degree in international studies from the University of Pacific, and certificates in corporate governance from both the Board Director Training Institute of Japan and the Wharton School of Business.

Michael Allen
Japanese Turnaround Situations, Short-Ideas
• Azabu Research

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