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

COSMOS Pharmaceutical Corporation operates drug stores based in Kyushu. The Company sells daily necessities such as drug medicines, foodstuffs, and alcoholic beverages.

<ul>
<li>Cosmos Pharmaceutical Corp (a drug store chain operator that sells mostly food) is scaling faster than peers, opening stores organically while maintaining unusually stable per-store operating profit.</li>
<li>Its food-led discount model creates high traffic, purchasing leverage, and a long runway in Japan’s fragmented packaged-food market.</li>
<li>Slow, secular decline in RoE is inevitable, but the market is discounting an unrealistically fast pace of decay. Cosmos still has a very long growth runway.</li>
</ul>


Cosmos Pharmaceutical Corp (a drug store chain operator that sells mostly food) is scaling faster than peers, opening stores organically while maintaining unusually stable per-store operating profit.
Its food-led discount model creates high traffic, purchasing leverage, and a long runway in Japan’s fragmented packaged-food market.
Slow, secular decline in RoE is inevitable, but the market is discounting an unrealistically fast pace of decay. Cosmos still has a very long growth runway.


Cosmos (3349): Still Miles of Growth Runway

RICOH COMPANY, LTD. manufactures and markets office automation equipment, electronic devices, and photographic instruments.  The Company's diverse product line includes facsimiles, image scanners, printers, digital cameras, and personal computers, as well as a full range of analog, digital, and color copiers. Ricoh operates with a network of sales offices and tie-ups worldwide.

<ul>
<li>The market is pricing Ricoh as a terminal print asset, but the company has demonstrated an ability to harvest this asset and grow its cash flows.</li>
<li>Bears confuse managed IT's commodity perimeter with Ricoh's real core. Japanese enterprise document workflows are contractually and culturally sticky, resisting platform automation.</li>
<li>Activist Investors own shares of Ricoh equal to 57 days ADV, and they've increased their position as the stock under-performed. They were too early, but the consensus is late.</li>
</ul>


The market is pricing Ricoh as a terminal print asset, but the company has demonstrated an ability to harvest this asset and grow its cash flows.
Bears confuse managed IT's commodity perimeter with Ricoh's real core. Japanese enterprise document workflows are contractually and culturally sticky, resisting platform automation.
Activist Investors own shares of Ricoh equal to 57 days ADV, and they've increased their position as the stock under-performed. They were too early, but the consensus is late.


Ricoh (7752):  Activists Were Early, the Consensus Is Late

Aozora Bank, Ltd. provides banking services including deposits, savings, loans, foreign exchange transactions, and securities investments. Aozora Bank also provides services such as trust account, resolution and collection, and venture capital.

<ul>
<li>Consensus is stuck on legacy impairment risk, but NPLs have normalized, and real story is a business model that creates multiple paths to high exceptional asset growth and low overhead.</li>
<li>Internet banking is set to grow profits 60% annually and the Investment Banking segment is growing faster and more profitably than most rivals. </li>
<li>The U.S. office blowup is being over-extrapolated. Exposure is down to 2.2% of loans and US office rents are rising and vacancies falling.</li>
</ul>


Consensus is stuck on legacy impairment risk, but NPLs have normalized, and real story is a business model that creates multiple paths to high exceptional asset growth and low overhead.
Internet banking is set to grow profits 60% annually and the Investment Banking segment is growing faster and more profitably than most rivals. 
The U.S. office blowup is being over-extrapolated. Exposure is down to 2.2% of loans and US office rents are rising and vacancies falling.


Aozora (8304): The Street Is Fighting the Last War

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>The market sees testing as AI’s first casualty, but SHIFT is building an AI-powered Trojan horse into Japan’s ¥56tn modernization market.</li>
<li>Near-Term earnings are depressed by investment, hiring normalization, consolidation noise, and possible Rise impairment; none changes cash flow, long-run unit economics, or the path to 24% EBITDA CAGR.</li>
<li>At 9x EV/EBITDA and ~12x FY8/27 EPS, the stock discounts execution failure and permanent impairment; if conversion works even modestly, the current multiple is mispriced.</li>
</ul>


The market sees testing as AI’s first casualty, but SHIFT is building an AI-powered Trojan horse into Japan’s ¥56tn modernization market.
Near-Term earnings are depressed by investment, hiring normalization, consolidation noise, and possible Rise impairment; none changes cash flow, long-run unit economics, or the path to 24% EBITDA CAGR.
At 9x EV/EBITDA and ~12x FY8/27 EPS, the stock discounts execution failure and permanent impairment; if conversion works even modestly, the current multiple is mispriced.


Shift (3697): An AI Strategy Just Crazy Enough to Work

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>Fujikura’s shares dropped 19% following a mid-day announcement of EBIT 8% below consensus and guidance that was 32% below consensus.</li>
<li>Worse, the company warned that its guidance does not account for any potential disruptions resulting from closure of the Strait of Hormuz. In other words, the guidance is not conservative.</li>
<li>The market priced the stock as a pure play on datacenters, but only half of its business relies on data centers, which are slowing down, and the rest is declining.</li>
</ul>


Fujikura’s shares dropped 19% following a mid-day announcement of EBIT 8% below consensus and guidance that was 32% below consensus.
Worse, the company warned that its guidance does not account for any potential disruptions resulting from closure of the Strait of Hormuz. In other words, the guidance is not conservative.
The market priced the stock as a pure play on datacenters, but only half of its business relies on data centers, which are slowing down, and the rest is declining.


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.