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

Equity Bottom-Up

NIDEC CORPORATION is the world's leading manufacturer of small precision motors mainly used in HDD and optical disk drives. The company has extended its focus to the home appliance and automotive markets. NIDEC is active in M&A and its subsidiaries include the world's leading manufacturers of LCD panel handling robots and camera shutters.

<ul>
<li>Until the latest accounting scandal, Nidec was just another stupidly over-valued company that chased too many rainbows and missed too many targets.</li>
<li>Now, finally, it has fallen to interesting valuations and there is a real incentive to fix the things that need fixing. </li>
<li>Nidec is a governance nightmare with poor oversight, a history of bad strategic decisions, and shoddy execution. If these are fixed, though, the upside is enormous.</li>
</ul>


Until the latest accounting scandal, Nidec was just another stupidly over-valued company that chased too many rainbows and missed too many targets.
Now, finally, it has fallen to interesting valuations and there is a real incentive to fix the things that need fixing. 
Nidec is a governance nightmare with poor oversight, a history of bad strategic decisions, and shoddy execution. If these are fixed, though, the upside is enormous.


Can Nidec (6594) Ever Wake Up from Its Compliance Nightmare?

Fujikura Ltd. manufactures and sells wires and cables such as optical fiber cables and coaxial cables. The Company's products include optical transmission system, electronic materials, and telecommunication cables.

<ul>
<li>Rapidly shifting technology could cause cable demand to plunge by 50% per unit of data center capacity as 800g becomes standard.</li>
<li>We don’t anticipate any negative surprises in the coming 1-2 quarters, but we think consensus is overestimating post-3/26 EBIT by at least 20%.</li>
<li>Even after a tech-led sell-off, at 25x EV/EBITDA, there is still no room for this kind of error. </li>
</ul>


Rapidly shifting technology could cause cable demand to plunge by 50% per unit of data center capacity as 800g becomes standard.
We don’t anticipate any negative surprises in the coming 1-2 quarters, but we think consensus is overestimating post-3/26 EBIT by at least 20%.
Even after a tech-led sell-off, at 25x EV/EBITDA, there is still no room for this kind of error. 


Mitsui Chemicals, Inc. manufactures and markets a variety of chemical products. The Company's products include ethylene, propylene and other petrochemicals, basic chemicals, synthetic resins, and fine chemicals.  The Company operates worldwide.

<ul>
<li>Mitsui Chemicals is slashing exposure to commodity chemicals and ramping up high-margin specialty films and resins—setting the stage for its RoE to soar from 5% to over 13%.</li>
<li>Restructuring is unlocking massive cost savings while driving growth from cutting-edge segments that are poised for double-digit growth and global dominance.</li>
<li>The stock trades at a deep discount, but could easily command a premium with solid execution, driving the share price to more than double or even treble within 3 years.</li>
</ul>


Mitsui Chemicals is slashing exposure to commodity chemicals and ramping up high-margin specialty films and resins—setting the stage for its RoE to soar from 5% to over 13%.
Restructuring is unlocking massive cost savings while driving growth from cutting-edge segments that are poised for double-digit growth and global dominance.
The stock trades at a deep discount, but could easily command a premium with solid execution, driving the share price to more than double or even treble within 3 years.


Mitsui Chemical (4183): Releasing the Crackers!

ADVANTEST CORPORATION produces semiconductor testing devices and electronic measuring instruments.  The Company's products include large-scale integration (LSI) test systems, memory test systems, dynamic test handlers, network analyzers, electronic meters, optical testing devices, and signal sources.

<ul>
<li>Nearly every comment on Japanese equities is focused on the half of the market that trades below book, but last week, Advantest, which trades at 18x book, exploded 30%.</li>
<li>Searches for “AI Bubble” on google are up 90%, but Advantest’s share price exploded because it became clear that investors were underestimating demand for AI related hardware.</li>
<li>Fear and Hype on both sides proved overdone. When I searched for the truth, I found only 1 red flag, 2 green, and 7 yellow.  </li>
</ul>


Nearly every comment on Japanese equities is focused on the half of the market that trades below book, but last week, Advantest, which trades at 18x book, exploded 30%.
Searches for “AI Bubble” on google are up 90%, but Advantest’s share price exploded because it became clear that investors were underestimating demand for AI related hardware.
Fear and Hype on both sides proved overdone. When I searched for the truth, I found only 1 red flag, 2 green, and 7 yellow.  


Advantest (6857) Bubble Watch: 1 Red Flag, 2 Green, 7 Yellow. You Decide.

NOF CORPORATION is a diversified chemical producer whose products include processed oil/fats, explosives and other chemical products. The Company has manufacturing/sales subsidiaries in US, Indonesia and China.

<ul>
<li>Japan’s defense budget may be set to surge by about 50%, making NOF’s ammunition business a hot theme.</li>
<li>Be careful though. NOF’s munitions segment faces production limits and slow capacity expansion, capping near-term profit growth even with new defense spending.</li>
<li>We think NOF is overvalued, even as we acknowledge consensus forecasts are probably too low. But shorting now would probably just be fighting the tape. Save this idea for later.</li>
</ul>


Japan’s defense budget may be set to surge by about 50%, making NOF’s ammunition business a hot theme.
Be careful though. NOF’s munitions segment faces production limits and slow capacity expansion, capping near-term profit growth even with new defense spending.
We think NOF is overvalued, even as we acknowledge consensus forecasts are probably too low. But shorting now would probably just be fighting the tape. Save this idea for later.


Shorting NOF (4403) Just Now Is Probably a Very Bad Idea

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.