1、 Japan:Accelerating OpportunityWhat Investors Can Learn by Looking Towards the Japanese MarketJapan:Accelerating OpportunityIn Asias rapidly evolving markets,it would be easy to overlook Japan-the country has traditionally been quite insular,with an unexciting stock market.Until recently,corporate g

2、overnance was a black box and access to information and data was limited for outside observers.This seems to be changing,and a number of different trends are converging to paint a more auspicious picture for investors.New corporate governance and stewardship codes are being implemented.Activist inve

3、stors are making their presence felt in the countrys board rooms,demanding better governance and improved transparency.A new Prime Minister,Yoshihide Suga,has been elected in the place of the departing Shinzo Abe,with a plan to revitalise Japans domestic economy and boost small and medium enterprise

4、.And Warren Buffett recently surprised market watchers by dropping US$6 billion on five Japanese trading companies.It seems one cannot afford not to be watching Japan closely at the moment.With this in mind,we have put together this special edition of Insights on the Japanese market,produced by inde

5、pendent Insight Providers with deep knowledge of the country and its nuances.We hope you find these Insights as thought-provoking and informative as we did-they are but a taste of the differentiated,high-quality research these Insight Providers publish daily on Smartkarma.If you want to discover mor

6、e high-quality intelligence in this vein,visit .Research ReinventedSmartkarma unites Independent Research Providers,Investors,and Investor Relations in one network.Cover Photo by Andre Benz on Unsplash Table of Contents1.Dividends and Repo as Asset Classes-Focus on the Nikkei 2254 Index-Brian Freita

7、s2.Japan Needs More Cowbell-Travis Lundy123.Mercari Our Ten Bagger Call Is Actually Starting25 to Look Somewhat Sane-Mio Kato4.Rakuten:Core Businesses Are Doing Well but Logistics33 and Mobile Investments Are Eating into Profits-Supun Walpola5.What Warren Buffett Knows About Japan?Is It That Tokyo40

8、 Stocks Are Now The Cheapest in 50 Years?-Michael J.Howell6.JAPAN Some Thoughts on Suga Yoshihide as PM45-Campbell Gunn7.Softbank Corp A Simple Suga PM Telco Trade-Mio Kato498.Small Cap Growth:RPA(6572)-The Digital Workforce56-Mark ChadwickThematic(Sector/Industry)Dividends and Repo asAsset Classes-

9、Focuson the Nikkei 225 IndexBy Brian Freitas|14 Jul 2020EXECUTIVE SUMMARYOver the last few years,with the advent of listed dividend futures,a largespectrum of market participants have started to trade dividends making itan asset class in its own right.With heightened equity market volatility andunpr

10、ecedented central bank intervention,investing and trading in dividendsvia the SGX Nikkei 225 Dividend Futures provides market participants witha pure play on company fundamentals without taking on any of the equityvaluation risk.This has increased liquidity in the product and expectationsare for vol

11、umes and open interest to continue to grow over time.Equity implied repo,on the other hand,is not as widely traded but thatis changing with the introduction of listed Total Return Futures(TRF)thatclosely replicate the pay-off of OTC traded Total Return Swaps(TRS).TRFsoffer numerous advantages over T

12、RS in that they are fully fungible,centrallycleared(mitigates counterparty risk),and portfolio margined(offeringmargin offsets with other listed products).Japan implied equity repo hasbeen volatile over the last few years partly due to the Bank of Japans ETFbuying program opening up trading opportun

13、ities and attracting a new breedof investors to the TRF product.The SGX Nikkei 225 TR Index Futures offer atrading vehicle to get exposure to the index repo.DETAILNIKKEI 225 DIVIDEND INDEX FUTURESThe Nikkei 225 Dividend Point Index represents an index that computes theaccumulated dividends that an i

14、nvestor would have been entitled to receiveif the investors had held the constituents of the Nikkei 225 Stock Averagefor a calendar year.The Nikkei 225 Dividend Index Futures contract listed onthe SGX gives market participants an instrument to express their view on thedividends of the Nikkei 225 ind

15、ex constituents.Dividends and Repo as Asset Classes-Focus on the Nikkei 225 Index4Brian FreitasPan-Asia Delta One/Event-DrivenBrian Freitas is a highly experienced Delta One trader with 17 years of experience trading arbitrage and related strategies across Asian marketsAreas of Expertise Primary Ass

16、et Class:Equities Geography:Asia Pacific Countries:India Sectors:GeneralistContent Verticals Event-Driven,Quantitative AnalysisBrian FreitasWith elevated equity market valuations brought on by central bankintervention and the ensuing volatility,the SGX Nikkei 225 Dividend Futuresprovides market part

17、icipants with a pure play on company fundamentalswithout taking on equity valuation risk.The Nikkei 225 Dividend Point Index has risen sharply since 2014 followingthe introduction of the Stewardship Code and the Corporate GovernanceCode.Following the COVID-19 pandemic,the Nikkei 225 Dividend Index F

18、uturesare pricing a decrease in dividends in 2020 due to lower corporate earningsaffected by lower domestic consumer demand,lower exports and astrengthening Japanese Yen.Current Dividend Futures Term StructureContractExpiry DateCloseOpen InterestDividend Notional JPYmSNDZ201/04/20214068,13733,036SND

19、Z211/04/20223907,62529,738SNDZ223/04/20234151,0204,233SNDZ231/04/2024422.74361,843SNDZ241/04/20254302295SNDZ251/04/2026428.6939Dividends and Repo as Asset Classes-Focus on the Nikkei 225 IndexBrian Freitas5Application of Nikkei225 Dividend FuturesThe main uses of dividend futures are for:Directional

20、 Exposure to dividendsHedging dividend exposureRelative Value TradingArbitrageUsers of Dividend FuturesFundamental Investors:Asset Managers,Endowments,Pension Funds,Sovereign Wealth Funds,Insurance companies,Hedge FundsDelta One/Index Arbitrage DesksVolatility Trading DesksStructured Products Issuer

21、sUse CasesDirectional ExposureMarket participants can take long or short positions on index dividends toexpress their views based on fundamental bottom-up or top-down analysis.For example,if an analysis of the Nikkei 225 index constituents projectedearnings and dividends indicates that the fair valu

22、e for the Nikkei 225 2021dividend futures contract is 403 and the contract is currently trading at 390,market participants can buy the dividend futures contract at 390 to play theupside without taking on any equity valuation risk.Similarly,if an analysis of the Nikkei 225 2022 index dividend futures

23、indicates a fair value of 405 index points while the dividend futures contractis trading at 415,market participants can sell the dividend futures at 415index points without taking on any equity valuation risk.Hedging Dividend ExposureEndowments,insurance companies or pension funds expect to cover pa

24、rt oftheir costs or liabilities from dividend inflows from their holding of Japaneseequities.If they are concerned that dividend cuts could affect their ability tomeet their liabilities or costs,they could sell the SGX Nikkei 225 dividendfutures to hedge their exposure.For example,an insurance compa

25、nyconcerned with the impact of COVID-19 on Japanese corporate earningscould sell the SGX Nikkei 225 Dividend Futures to get some protection.Dividends and Repo as Asset Classes-Focus on the Nikkei 225 IndexBrian Freitas6Volatility Trading desks generate dividend exposure when trading longerdated call

26、s,puts,and other option strategies.The desk can hedge theirdividend exposure by trading a dividend futures strip to the expiry of theoptions trade.For example,a volatility trading desk sells a Nikkei 225 calloption expiring in March 2023 and hedges the delta with long Nikkei 225index futures contrac

27、t expiring in March 2021.This leaves the desk with along dividend exposure from the expiry of the March 2021 index futurescontract to the expiry of the call option in March 2023.The desk can hedgethis exposure by selling the Nikkei 225 dividend futures contracts that coverdividends for 2021 and 2022

28、.Structured Products desks have a large long exposure to dividends due to theissuance of capital guaranteed products and reverse convertibles linked to theNikkei 225 index.This dividend exposure can be hedged by selling Nikkei 225dividend futures.Relative Value TradingWith the Nikkei 225 2021 divide

29、nd futures contract trading at 390 versusthe 2022 dividend futures trading at 415,investors that believe the spread istoo wide can buy the 2021 dividend futures while selling the 2022 dividendfutures and locking in the gains when the spread narrows.In cases where the dividend futures term structure

30、is inverted,investors canbuy the longer dated futures and sell shorter dated futures to profit froma steepening of the curve,or set up systematic strategies that buy longerdated futures to earn a liquidity premium.If there is a short term sell-off in longer dated dividend futures due to the issuance

31、 and hedging ofstructured products,arbitrageurs could buy the longer term dividend futureswhile selling the short term dividend futures.Investors can trade the Nikkei 225 dividend futures contracts versus dividendfutures contracts on other indices to express their views on relativeoutperformance/und

32、erperformance due to changes in the macroeconomicand regulatory environment,changes in tax laws and other factors.ArbitrageDelta One desks can use the Nikkei 225 dividend futures contracts to hedgedividend exposure from trading long dated futures or calendar spreads,pricereturn swaps,or index forwar

33、ds.For example,a delta one desk sells a Nikkei 225 price return swap expiringin March 2023 to a client and hedges the swap with a basket of Nikkei 225constituents.This leaves the trader with a long position in the Nikkei 225dividends from the trade date to the expiry date of the swap.The tradercan h

34、edge the long dividend position by selling Nikkei 225 2021 and 2022dividend futures.Dividends and Repo as Asset Classes-Focus on the Nikkei 225 IndexBrian Freitas7If a delta one desk identifies a repo mispricing and buys the December 2023Nikkei 225 index forward and sells the near month Nikkei 225 i

35、ndex futuresas a hedge,the position generates a short dividend exposure on the tradingbooks.The desk can hedge this dividend exposure by buying the Nikkei 225dividend futures contracts expiring in 2020,2021,2022 and 2023.NIKKEI 225 INDEX TOTAL RETURNFUTURESThe Nikkei 225 Index Total Return Futures(T

36、RF)are a listed solution to tradethe implied equity repo rate,closely replicating the pay-out profile of a Nikkei225 Total Return Swap(TRS).The TRF offers more benefits versus a TRS.As a fully fungible listed product,a TRF increases market liquidity andtransparency while increasing the number and di

37、versity of marketparticipantsCentrally cleared by the exchange,TRFs help in reducing counterpartyriskPortfolio margining offers margin offsets for TRFs with other SGX listedproductsThe Implied Equity Repo RateThe implied equity repo rate is volatile over time and has its own termstructure.Short term

38、 repo is mainly driven by the amount of stock inventory availablefor lending and the demand for inventory,either for short selling,ascollateral or for corporate action trading.In bearish markets,there is a highdemand for stock borrow accompanied by selling on the index futures leadingto higher repo

39、rates.Changes in the regulatory framework affecting theability of financial institutions to hold stocks on their balance sheet couldmake the repo negative in the short-term.Dividends and Repo as Asset Classes-Focus on the Nikkei 225 IndexBrian Freitas8Long term implied repo is mainly affected by the

40、 trading of long datedfinancial derivatives and issuance of structured products to private banks andretail investors.The flow from the hedging of these products could distort theimplied repo levels and open up trading opportunities.Application of Nikkei225 Index Total ReturnFutures(TRF)The main uses

41、 of index total return futures are for:Directional ExposureRelative Value TradingHedgingUsers of Index Total Return FuturesFundamental Investors:Asset Managers,Endowments,Pension Funds,Sovereign Wealth Funds,Insurance companies,Hedge FundsDelta One/Index Arbitrage DesksStructured Products IssuersUse

42、 CasesDirectional ExposureFundamental Investors can trade Nikkei 225 Total Return Futures to getlong-term directional exposure to the Nikkei 225 index as well as short-termexposure as part of their tactical asset allocation.Market participant can buy a Nikkei 225 Index TRF expiring in December 2025a

43、s part of their Strategic Asset Allocation.If markets run up and the marketparticipant feels that there could be a correction,they could sell a Nikkei 225December 2020 TRF as part of their Tactical Asset Allocation program.Thishedges out the market exposure,dividend exposure and leaves only a residu

44、alexposure to the repo.Reducing Short-Term Index Futures Roll Risk&Dividend RiskThe repo on short-term futures rolls is volatile depending on marketconditions,collateral availability and requirements,investor positioning anddividend uncertainty.Trading total return futures locks in the repo till the

45、expiry of the futures,reduces dividend uncertainty and reduces transactioncosts.Dividends and Repo as Asset Classes-Focus on the Nikkei 225 IndexBrian Freitas9Relative Value TradingDelta One desks,Hedge Funds,and to a lesser extent other Asset Managers,trade index futures calendar spreads to take ad

46、vantage of perceivedmispricing of the repo term structure.However,this leaves dividend exposureon the trading books.Trading calendar spreads on total return index futures neutralizes equitymarket exposure,dividend exposure and the overnight funding,while leavingonly the repo exposure on the trading

47、books.For example,a market participant that believes the repo curve is too steepcould sell the December 2025 TRF while buying the December 2020 TRF.Atinitiation of the trade there is almost no equity market exposure,no dividendexposure,and no exposure to overnight funding with only exposure to there

48、po between December 2020 and December 2025.Inventory ManagementMarket participants,such as ETF providers,that hold index replicatingbaskets of Nikkei 225 stock could shift to TRFs when the repo on the TRFsfalls below the rate at which they can reinvest the cash,generating alphaand helping outperform

49、 their benchmark.Shifting from stocks to TRFs alsoreduces balance sheet requirements and eliminates the risk and costs ofrebalancing the basket when there are changes due to an index review.CONCLUSIONSDividends are already recognized as an asset class and there is a fairamount of trading in dividend

50、 futures across different investor classes.As dividend futures go mainstream,volumes should increase with highnet worth individuals and retail investors starting to trade the product.Trading in equity repo on the other hand is still dominated by globalinvestment banks and sophisticated investors.Vol

51、umes in Total Return Futures will continue to pick up over time asinvestors shift from OTC products to listed products due to regulationand the increase in liquidity on screen.Dividends and Repo as Asset Classes-Focus on the Nikkei 225 IndexBrian Freitas10Disclosure&CertificationI/We have no positio

52、n(s)in the any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material informa

53、tion.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed th

54、e Insight Provider Agreement and this insight does not violate any of the terms specified therein.Brian Freitas(14 Jul 2020)Dividends and Repo as Asset Classes-Focus on the Nikkei 225 IndexBrian Freitas11FamilyMart Co Ltd|ESGJapan Needs More CowbellBy Travis Lundy|20 Jul 2020EXECUTIVE SUMMARYI had t

55、he privilege of writing a letter to the FTs Alphaville in January titledThe GPIF and the complexity of stewardship about some of the ESG andstewardship issues involved with passive investing,and particularly thosewhich might concern the GPIF the worlds largest pension fund at$1.5+trln.During his ten

56、ure at the GPIF,then-CIO Hiro Mizuno promoted strongerstewardship,more rigorous voting practices,and true(not tick-the-box)engagement efforts from GPIF-allocated managers.He also changed themandate and fee structure to aim for a win-win relationship with managers.Famously,he helped push for a policy

57、 of not lending out its foreign sharesbecause he felt that stewardship could not be honest if the title were lent out(note the policy was already to not lend out the Japanese portfolio).However,passive funds(90%of the GPIF equity allocation)still facestewardship dilemmas.Helpfully,the GPIF has devel

58、oped a public stewardship policy,and in itsrecent Stewardship Activities Report there is a section dedicated specificallyto passive management,including“the possibility of collaborativeengagement”(working with other investors to engage with a company),matching the change in the Japan Stewardship Cod

59、e in March 2020.Engagement by its managers with investee management is designed to“encourage investee companies to increase their corporate value and thesustainable growth of the entire market from the long-term perspectives.”Arising tide lifts all boats.In my letter to Alphaville I suggested,“Elimi

60、nating one of the root causes ofundervaluation a lack of active investor confidence that Japanese companieswill do the right thing with the capital allocated to them might be the bestlong-term investment the GPIF could ever make.”Indeed,a key aspect of Principle 1 of the Japan Corporate Governance C

61、oderequires that directors and companies not conduct capital action that is notnecessary,and which might be deleterious to the interests of minorityshareholders.Alas,when one company owns a large stake in another,theinterests on one side can conflict with the interests of minorities.Japan Needs More

62、 CowbellTravis Lundy12Travis LundyPan-Asia Catalysts/Events|Quiddity AdvisorsTravis Lundy has 20+years of experience in Asia doing alternative strategies in fixed income,equity derivatives,and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money

63、.Areas of Expertise Primary Asset Class:Equities Geography:Asia Pacific Countries:Japan,Hong Kong Sectors:GeneralistContent Verticals Event-Driven,Quantitative AnalysisTakeover Governance&StewardshipTakeovers effectively the inverse of public capital raises are keygovernance bottlenecks because at t

64、he“wrong”price,they cement a sub-optimal return on that capital forever.Good voting policy in mergers willsolve a lot of issues.However,the issue of engagement with corporategovernance becomes complicated with cash takeovers.Somebody bids.The target board approves.It is announced.Investors accept,or

65、 do not.There is no vote on cash takeovers in Japan and the Target Board decisionusually comes before any shareholder input.With a good governance processmanaging a change-in-control proposal,general investors can be reasonablysure they are obtaining an appropriate price for losing the chance to sta

66、yinvested.However,where the bidder is already a controlling owner ormanager,there is a possibility of serious conflict of interest,and governanceproblems galore.Recognizing this conflict of interest issue,METI created its MBO Guidelinesin September 2007.Developments in Corporate Governance and the i

67、ssue oflisted subsidiaries meant newer guidelines for avoiding conflict of interestwere desirable.METI presented revised Fair M&A Guidelines in June of2019.Those Guidelines(which are not law)are described as“ideal approaches tofair M&A”so as to mitigate the inherent conflicts of interest in transact

68、ionswhere the buyer has incumbent ownership,board position,andinformational advantage.The Guidelines note in implementing fair M&A.A“market check”helps assure arms length pricing,Transparency to mitigate information asymmetry is desirable,Minority shareholders should benefit from a Special Committee

69、 madeof independent directors,who should receive their own financial andlegal advice-separate from that of the Board,The Special Committee should receive an independent valuation,and afairness opinion,The Special Committee should demand a majority-of-minoritythresholdSince then,many MBOs and parent-

70、subsidiary sales/buyouts proposed inJapan have addressed these conflict of interests,following most if not all ofthe points mentioned in the Guidelines.Some,however,have not.MBOs remain a sticking point.Recently,a fewstand out.Japan Needs More CowbellTravis Lundy13Nichii Gakkan(9792)Nichii Gakkan Co

71、(9792 JP)-a decades-old company in one of the fewnatural growth industries in demographically-challenged Japan nursinghomes saw its founder pass away last September.Board member heirs inmanagement positions inherited shares,with an inheritance tax liabilitydifficult to pay without selling some of th

72、e familys combined 44%stake.AnMBO proposal was made in conjunction with Bain with the stated goal oftaking the company private to restructure some segments,promotingmedium-long-term growth in corporate value without public investorssuffering the indignities of a hit to short-term earnings.In May,the

73、 biddersoffered a price 30%above the last traded price.Thats the pretty version ofthe story.The less pretty version might be that the family,Bain,the Board,andmanagement of Nichii Gakkan are irreparably conflicted with their generalinvestors,who constitute the majority.They wanted to take the compan

74、yprivate to get cash to pay their inheritance tax,but they wanted to keepcontrol of the company,and they opportunistically lowballed investors.Theystarted looking at the deal,concluding it was necessary,when the shareswere trading near 1600/share and they would have expected to pay a 25+%premium.Mar

75、kets fell,and they ended up bidding 1500/share.To be clear,it is Bains job as an investor to buy things cheaply.As aninvestor,they have no duty of care to minority investors in companies theywould seek to take over.But the Nichii Gakkan board does in this case.Management is beholden to family contro

76、l.Three quarters of the board isfamily or management.One director is from Bain Japan,joining the MBO.Two other board members are independent(but were originally selected bythe conflicted board)and it rested upon those two to defend the interests ofthe 56%of general shareholders against the conflicte

77、d 44%ownership andmajority-conflicted Board.The M&A Guidelines were an ideal place for the independent boardmembers to look to ensure fairness.In the Nichii Gakkan case,investors gotnone of it.No market check.No transparency on how“fair valuation”was calculatedfrom the Board.Independent directors re

78、ceived no independent legal orfinancial advice or valuation,and no fairness opinion.And there is nomajority of minority clause to ensure half the 56%of public shareholdersagree.The Special Committee agreed to use a valuation report prepared by aconflicted advisor,who was hired on a fee-for-success b

79、asis by the conflictedBoard,based on conflicted managements unchecked forward revenue andEBIT forecasts,to agree to a conflicted owner/management proposal to buyand squeeze out minority investors.And independent board members wentwith that.They could have asked for a Fairness Opinion,but did not.Jap

80、an Needs More CowbellTravis Lundy14Reasonable minds may disagree on price.The market obviously thinks theTender Offer Price for Nichii Gakkan to be light.The self-interested buyersthink it“fair.”But three things stand out.First,when the family engaged,they likely penciled in a premium tothen-market

81、price for control.Despite no subsequent change in profitsor forecast,the offer price ended up lower.Second,the official Vision 2025 Mid-Term Management Plan,reaffirmed as late as November 2019,targets forward profit and revenuewhich are multiples of the management forecasts in the“valuation”consider

82、ed by the Board.There is no explanation for why managementlowballed its long-standing board-approved long-term public targets.Third,the banks lending package to fund this deal covers the entirepurchase price.The equity being rolled over is just to finance the roll ofsome of the existing debt which m

83、ay be covered by change of controlclauses.If you LBO a company and the banks require zero money down,investors should consider if they are selling too cheaply.These reasons,on top of the lack of appropriate governance procedure,arereasons for Nichii Gakkan investors to complain.It is,in fact,appropr

84、iatereason for all investors to sit up and take notice of what is happening in theirportfolios.What Can Be Done?One could argue investors retain appraisal rights,and indeed the documentsrefer to those rights,but the Supreme Court decision on the JCOM takeoverhas neutered that avenue to some extent b

85、ecause a“fair process”is deemedto ensure a fair price.My response to that is that when the only valuation to support boardagreement on price is based on conflicted management forecasts,it is bydefinition impossible to achieve a“fair process”but this seems to haveescaped the Court.More work is needed

86、 to ensure fairness.The law is written.The guidelines are proposed.Boards andmanagement are still conflicted.It is up to shareholders to defendtheir own interests.There are a few ways to fix this.1.One,changes could be made to law,mandating good behavior.The UKTakeover Code does just that to protect

87、 minority shareholders.2.Two,directors could be made liable for bad governance decisions as inother countries.3.Three,investors can spend years(or decades)trying to win hearts andminds of company management and boards through engagement.Japan Needs More CowbellTravis Lundy154.Four,investors can try

88、to win the hearts and minds of fellow investorsto ensure minority investors know how to protect themselves againstweak governance.The big issue for investors is bad actors ignoringGuidelines,and exercising conflict of interest not possible in othermarkets.Legal changes in Japan require years or deca

89、des of lobbying.The NichiiGakkan tender ends,so far with two delays,in two weeks time.The boardhas approved the deal.Management agrees.That management happens tobe affiliated with the buyer doesnt help.Engagement?Talk to the hand.In this case and any other in the near-term,only“collaborative engagem

90、ent”seems like a reasonable response.Unfortunately,in a foreshortened timeframe(30 business days for many tender offers these days),“collaborativeengagement”behind closed doors does not allow stewardship-mindedinvestors to communicate their concerns so the wider investor base,perhapsless well-inform

91、ed than pros,may digest the governance issues affectinglong-term returns.The only way left is public engagement.So far,we know of one investor,LIM Advisors,which has presented its caseto the Nichii Gakkan board and to the public.The board did not respond.LIM has re-presented its demands.From the 200

92、+other signatories to theJapan Stewardship Code who may also be concerned with governance andloss of capital due to management conflict of interest?Crickets.That only one shows up publicly here,and only one showed up in the multi-month governance sham that was the Unizo takeover suggests signatories

93、 tothe Japan Stewardship Code need to think more aggressively about how theyengage.Stewardship Investors are mandated to follow a policy to achieve thebest results for their investors.It should be no shame to engage publicly.As always,more below the fold.Japan Needs More CowbellTravis Lundy16DETAILT

94、he other deals which are out there which have recently had this problemare,of course,Itochu Corp(8001 JP)s deal for FamilyMart Co Ltd(8028 JP)and Sony Corp(6758 JP)s deal for Sony Financial Holdings(8729 JP).Sony Financial Holdings(8729)(insight linkhere)This deal came after many years of speculatio

95、n,and indeed investorspublicly pushing Sony and Sony Financial to do the deal.Sony approachedSony Financial when the Sony Financial share price was trading around2600.It would have been normal to expect a 25-35%premium.Sonyinstead proposed a share exchange ratio.It was not mentioned what thatratio w

96、as,but often share exchanges are done without premium.That was the lowest point of the Sony Financial/SONY share price ratio sinceSony Financial was listed well over a decade ago.Sony Financials board asked for a cash bid.COVID-19 fears roiled markets.Sony offered 2000/share.Shares bounced inthe int

97、erim.Sony lifted its bid.The bid ended up being 2600/share,whichwas a zero premium to when Sony approached Sony Financial.That was a.three month high.And Sony Financial seems relativelyunaffected by COVID-19.Indeed online sales insurance seems more likely togain market share vs traditional middy sal

98、es(in-person sales by peoplewho visit your home or workplace).But it was zero premium to when Sony first approached Sony FinancialWas COVID-19 an expected problem which would reduce the value of SFHscashflows?So far there is no serious indication of that.Street consensus onforward EBIT expectations

99、did not dip notably and instead are higher nowthan they were in the January-March period.Majority of Minority?Nope.If Sony gets 1.6%of shares out(less than 5%ofthe minority)then can squeeze out all the minorities.Calculation of synergies to be gained and appropriate portion granted togeneral shareho

100、lders in the price?There is no note of that at all.Market check?Ha.No.Did Sony Financial NEED to do this deal?Is there some great synergy here?Not easy to see.But they say there is.Japan Needs More CowbellTravis Lundy17As a result,as stated below,according to the Targets Announcement,the Target conc

101、luded that as a result of becoming a wholly-ownedsubsidiary of the Tender Offeror,it is expected that synergies will becreated,thereby contributing to increasing its corporate value.announcement,paragraph 2,p13(link)and there is a list of Target-expected synergies on p7 of the document.If there is,o

102、f course,the METI Fair M&A Guidelines suggest that generalshareholders should get an appropriate portion of the expected synergies.The Targets valuation and fairness opinion?They dont include synergies.The Independent Committees valuation and fairness opinion?They dontinclude synergies in their fair

103、 value either.The Fair Value range inputs?Then,the share value of the Target was evaluated by making certainfinancial adjustments such as adding the value of the amount ofinvestment to each subsidiary engaged in other businesses,and cashand cash equivalents held by the Target,and the per-share value

104、 of theTargets Common Shares has been evaluated to range from JPY 2,428to JPY 3,163.The cost of equity adopted commonly for each businessis 7.143%to 8.573%.The perpetual growth method and multiplemethod are adopted for the valuation of the terminal value.Accordingto the Targets Announcement,a rate o

105、f 0%is adopted as the perpetualgrowth rate,and 10.08 times is adopted as the PER multiple for the lifeinsurance business,9.28 times is adopted as the PER multiple for thenon-life insurance business,and 7.50 times is adopted as the PERmultiple for the banking business,respectively.That group of numbe

106、rs generates the range of fair value.The fair valuerange by the DDM method set by the Independent Committees FinancialAdvisor is 2,428-3,163.The agreed price is in the bottom quartile of that range,there are nosynergies added,it requires less than 5%to agree to the deal,there is zeropremium to where

107、 the stock was trading when Sony Financial wasapproached.This is a cramdown.One could say there is no real control premium negotiated.Theagreed price is in the bottom quartile of the fair range whichdoes not include control premium,or synergies.“Japan Needs More CowbellTravis Lundy18One could say th

108、at the protections negotiated by theIndependent Committee and Target Board with regard to theMETI Fair M&A guidelines were minimal,at best.If there were synergies which made such a transaction desirable,none of them are afforded to general shareholders in theassessment of fair given that they were e

109、xpressly not includedin the calculation.This begs the question:why would the Independent Committeethink this a desirable or reasonable price at all?I do not know.Shareholders need to understand this.And if they do not knowwhy the price is like that,they need to complain.And if youcomplain privately,

110、nobody else will know that there is anydissent.There is some strength in numbers and in knowing youare not alone.FamilyMart(8028)(links to first and secondinsights)In this particular case,I have already done my diatribe.It is probably notworth repeating here but the first part of the insight The Ame

111、ndedFamilyMart Document Is A MUST READ For Investor-Stewards goes throughthe same process,outlining where Target Company directors and theIndependent Committee faltered in their efforts to ensure generalshareholders(i.e.everyone but the controlling shareholder)were notabused by the majority sharehol

112、der who had extra information.In this case,the Independent Committee.did not perform a Market Checkneglected to get a Fairness Opiniontried,but did not get either majority of minority OR a minimum two-thirds thresholddid not achieve a price which was as high as the low end of the DCFrange offered as

113、 fair for the Target Company shares.did not achieve a price equal to the last Tender Offer conducted(despiteEBIT having risen 75%since,and having been higher than the EBITwhich was in the forward forecast for THAT Tender Offers fair DCFvaluation).and did not negotiate for an appropriate portion of f

114、uture synergies.In short,it was something of a disaster.Japan Needs More CowbellTravis Lundy19Have There Been Others Recently?Yes.Despite what LIM Advisors said in one of its letters to Nichii Gakkan,severalMBOs and takeovers since the release of the METI Fair M&A Guidelines inJune 2019 have been in

115、adequate.Odelic(6889)(insight links here and here)saw the takeover price havea management forecast FCF Return on Takeover Price Enterprise Valueof 20%.Continuously.ex-Cash PER was 5.4x.On an adjusted EV/EBITDA basis was 3x.Aeon Kyushu(2653)Takeover of Maxvalu Kyushu saw the ratiosubstantially favor

116、the parent compared to the fair DCF valuationcalculations provided.UNIZO(3258)(insights here from 12 July 2019 onward)was a disasterof epic proportions.The company effectively instituted a poison pill byfiat,without shareholder approval.Yamaha Robotics(6274)?Link here.Iffy price.Iffy procedure.Showa

117、 Aircraft(7404)TOB by Bain(link here)seemed to undervaluethe vast landholdings because they had a very old purchase price.Toshiba TOB price for Nuflare(6256)was too light(links here and inthe insight stream shown to the right),and the process did not abide byall the measures in the METI Fair M&A Gui

118、delines.Ditto for Toshibastakeover ofMystar Engineering(4695)MBO was ENTIRELY the wrong price(linkhere with following insights in the insight stream to the right),andwhen one large shareholder bought in the market at above the TOBprice,they quickly bumped the price 20%.This was supported at anex-cas

119、h PER at 4.8x(Price ex-cash to FCF for FY21 5x,EV/EBITDA3x,PER ex-cash and investments at 1.5x).What Are the Takeaways?1.Cash Tender Offers elicit no shareholder vote and those which are at apremium to where the price was trading often obtain management andboard support just because of who is asking

120、.2.Many Takeovers attempted by parent companies or family shareholdersconducting buyouts are done at prices which are opportunistic.Usually,the reason for the combination is that restructuring needed to growthe medium-to-long-term value of the business might engender short-term losses which would in

121、convenience public shareholders.TheTakeover/TOB/MBO is therefore an act of mercy by the controllingshareholder.Japan Needs More CowbellTravis Lundy203.Mercy or no mercy,shareholders deserve to be treated fairly bythe Board representing them,and in the case of a structurallyconflicted board-usually t

122、he case in such situations-by theIndependent Committee.It is thus of paramount importance thatsuch Independent Committee action take seriously their job to act inthe interests of minority shareholders(even when they are in themajority as in the case of Nichii Gakkan)to ensure that the sale is notjus

123、t not disadvantageous as deemed by some lawyer paid to say so,but is advantageous,seen over the medium to long-term.That meansstricter adherence to the METI Fair M&A Guidelines,and also theability to provide nuance.OBJECT TO THE PRICE IF IT IS OBJECTIONABLE.There is nothing to say that an Independen

124、t Committee has toapprove a deal just because one is proposed.4.Those who are duty-bound to uphold good corporate governanceare supposed to do so taking into account the medium-to-long-term growth of corporate value of their companies.Boards mightsee that a deal is in such interest.Stewards are mean

125、t to conducttheir portfolio management and engagement activities to achievethe same goal,but they are ultimately liable not to the invested assetsbut to their own investors.It behooves stewards to act in the medium-long-term of their investors-NOT in the short-term to accept a smallpremium to the re

126、cent trading price just because someone offers it toyou.5.Just because a parent offers a premium to you does not mean it isa good price.If you invested in a company and hold it simply with thelong-term goal to get back to the price of three months ago,yes youmight want to sell,but you should perhaps

127、 check whether that goal isaligned with your investors goals.6.Stewards have every right to make noise on behalf of theirinvestors,indeed if Boards of investee companies do not do theirjob,it is the OBLIGATION of stewards to make noise.That can bedone talking to Boards behind the scenes,but if the B

128、oard of a TargetCompany does not respond,then taking your complaint public so as toencourage collaboration with other investors as per the amendedStewardship Code is entirely suitable.Investors in other marketsroutinely get interviewed in media articles,or release statements,thata proposed takeover

129、price is inadequate.It is VERY rarely done inJapan.7.Passive investors should act in their own best long-term interests.Their interests are to outperform an index,but their interests are alsoto see the highest outright performance of index constituents possible.If someone proposes to take over a com

130、pany at a premium,it is notnecessarily in your investors interests to sell,or to agree to such atakeover.8.LASTLY,JAPAN NEEDS A NEW SET OF TAKEOVER RULES ANDPROCESSES.Japan Needs More CowbellTravis Lundy21Until legislators and bureaucrats enact laws which defend theinterests of minority shareholders

131、,and as long as parentcompanies and incumbent shareholders can bend the will ofBoards to take over companies at prices which are notdisadvantageous(wording which has no legally bindingdefinition),it behooves Stewards(i.e.investors)to ensure thatBoards do the right thing.That can mean objecting to de

132、als,anddoing so publicly.It can mean asking for higher prices and refusing to tender yourshares unless you get the right price.It can mean embarrassing companies by calling out their lack ofgovernance.Importantly,buyers have the conflict.It is arecognized conflict.The Target Board is supposed to mit

133、igateconflicts and act on behalf of shareholders who could sufferdisadvantage.Ask for Contingent Value Rights(CVRs).Ask for them every time.If a buyer and a target agree that there will be synergies,but thereis no appropriate portion of such future synergies in the takeoverprice,ask for it.If the ac

134、quirer fudges the accounting so that theCVRs end up having no value,then they are also admitting thatthey could not create synergies.If 7 of the next 10 deals do notcreate synergies-known because the CVRs do not pay anythingout-then it behooves Target Boards to understand that the dealproposed may n

135、ot have the likelihood of creating synergies-i.e.the reason for the deal is weak,and therefore the reason to acceptthe deal is weak.Unless shareholders are paid a PREMIUM TO FAIR including aCONTROL PREMIUM to account for the synergies available,and itis approved by a majority of a minority of shareh

136、olders,then theTarget Board has not done their job.Period.Buyers can propose atakeover,but boards do not have to agree.The new rules and processes which Japan needs would include.a majority of minority shareholder vote to approve boardsupport to further the efforts of the buyer.This treatment isclea

137、rly envisaged in the METI Fair M&A Guidelines becausethey recognise the strictures of the Companies Act can stilllead to abuse of minorities.make it mandatory.Require a higher level of approval than two-thirds to squeezeout minorities.Require a majority of minority from pre-dealpositioning,and make

138、the approval interconditional to thetakeover.a statutory understanding that unless all mitigants had beenaddressed adequately,board approval would not beappropriate.an understanding that existing price of comps,or past tradingprice,or a DCF price range as fair is not,by definition,a fairtakeover pri

139、ce.It is a fair reference price upon which apremium should be added.Japan Needs More CowbellTravis Lundy22An understanding that conducting a valuation process whichis based off the forecasts of conflicted management will endwith a price dependent on conflicted managements forecasts.There is no fair

140、involved.Management should be able toprovide their opinion,but a fair price should not be definedoff what management beholden to an existing owner says itis.Active use of appraisal rights with an appropriate process ofappraisal rights sanctioned by the courts.Just because aprocess is deemed fair by

141、lack of challenge does not meanthat it IS fair,and just because a court says the process is fairdoes not mean that the price is fair.There have beeninstances of companies being taken over at 20%FCF yields,and adjusted PERs of low single digits with no profitdownturn in sight.These are not fair price

142、s.Despite theJCOM decision,Appraisal Rights exist in the Companies Actand it is the duty of the Court to treat each case individually,and not blanket approve process which has deemedapproval because it hasnt been legally challenged.It is up to investors-active and passive-to engage with companies,bo

143、ards,each other,regulatory bodies,exchanges,etc to make it clearthat abuse of minority shareholders should not stand-not by courtswhich do not respect their rights according to the Companies Act,not byincumbent shareholders and beholden boards who recommend deals in theinterest of the controlling bo

144、dy,not by the services community which willsuggest in their valuations that securities holdings,land holdings,cash,etcdo not have value,or that do not unreasonably disadvantage minorityshareholders is an acceptable price.Japan Needs More CowbellTravis Lundy23Disclosure&CertificationDisclaimer Analys

145、t Certification The analyst named in this report certifies that(i)all views expressed in this report accurately reflect thepersonal views of the analyst with regard to any and all of the subject securities and companies mentioned in this report and(ii)no partof the compensation of the analyst was,is

146、,or will be,directly or indirectly,related to the specific recommendation or views expressed bythat analyst herein.Required Disclosures The analyst named in this report(or their associates)does not have a financial interest in thecorporation(s)mentioned in this report.Additional information will be

147、made available upon request.Global Disclaimer This report wasprepared by Ballingal Investment Advisors Limited(“BIA”).BIA is a limited company registered in Hong Kong and is authorised andregulated by Hong Kongs Securities and Futures Commission.The registered office is 20/F Shun Ho Tower,30 Ice Hou

148、se Street,Central,Hong Kong.This report is for the use of intended recipients only and may not be reproduced,in whole or in part,or delivered ortransmitted to any other person without our prior written consent.By accepting this report,the recipient agrees to be bound by the termsand limitations set

149、out herein.The information contained in this report has been obtained from public sources believed to be reliable andthe opinions contained herein are expressions of belief based on such information.No representation or warranty,express or implied,ismade that such information or opinions is accurate

150、,complete or verified and it should not be relied upon as such.Nothing in this reportconstitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipientsindividual circumstances or otherwise constitutes a personal recommendation.It i

151、s published solely for information purposes,it does notconstitute an advertisement,a prospectus or other offering document or an offer or a solicitation to buy or sell any securities or relatedfinancial instruments in any jurisdiction.Information and opinions contained in this report are published f

152、or the reference of therecipients and are not to be relied upon as authoritative or without the recipients own independent verification or taken in substitutionfor the exercise of the recipients own judgment.All opinions contained herein constitute the views of the analyst named in this report,they

153、are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities andcompanies mentioned in this report.Any reference to past performance should not be taken as an indication of future performance.BIAdoes not accept any liability whatsoev

154、er for any direct or consequential loss arising from any use of the materials contained in this report.This report is prepared for professional investors and is being distributed in Hong Kong by BIA to persons whose business involves theacquisition,disposal or holding of securities,whether as princi

155、pal or agent.Distribution or publication of this report in any other placesto persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited.I/We have no position(s)in the any of securities referenced in this insightViews expressed in this insight accu

156、rately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this insight comply with Singap

157、ore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified t

158、herein.Travis Lundy(13 Jul 2020)Japan Needs More CowbellTravis Lundy24Mercari Inc|Equity Bottom-UpMercari Our TenBagger Call Is ActuallyStarting to LookSomewhat SaneBy Mio Kato|06 Aug 2020EXECUTIVE SUMMARYThis is what Mercari just did:Delivered a consolidated operating profit in 4Q(984m vs.consensus

159、-3,477m)Hit their USD100m GMV a month target in the US which everyone,including us(and we like to think of ourselves as the biggest bulls onMercari)had completely given up on.Delivered 40%YoY GMV growth in Japan while cutting promotion costsby one third QoQ.Proposed to change their board structure f

160、rom 6 inside directors and 2outside directors to 2 inside directors and 3 outside directors,includingone female outside director.Unveiled a new data business which we have been excitedly touting forsome time.Yes,they benefitted from a COVID tailwind in both Japan and the US,butMercaris results outsh

161、ine domestic EC-type competitors and their success inthe US is eye-opening for a Japanese internet company.We are feeling veryhappy about this being our top conviction call for the year.DETAILThe Game ChangerJapanese non-manufacturing businesses do not have a history ofsucceeding overseas.When Merca

162、ri was conducting its IPO we conveyed extremescepticism about its overseas prospects.Mercari Our Ten Bagger Call Is Actually Starting to Look Somewhat SaneMio Kato25Mio KatoJapan/Asia Long-Short|LightStream ResearchMio Kato is the Founder of LightStream Research,and has over 15 years of experience l

163、ooking at Japanese and Asian cyclically driven sectors such as Gaming,Factory Automation,and Autos.Areas of Expertise Primary Asset Class:Equities Geography:Asia Pacific Countries:Japan Sectors:GeneralistContent Verticals Equity Bottom-Up,Equity Capital MarketsHowever,after speaking to the company w

164、e realised they wereserious about handing the reigns to a senior foreign executiveafter trying and failing to do things the Japanese way.Thecompany was also disciplined enough to shut down their UKoperations to focus on the US and ensure its success.We evaluated this rationality and self-awareness h

165、ighly then andstill do.This has been the result.This was not an easy achievement by any means,and it was not clearthat this would succeed until it did.Nevertheless,Mercari articulated a clear and rational plan in itspresentations and through its communications,stuck to it,andeventually delivered res

166、ults.In particular,our reading of their plan suggested that the companyinvested both time and money in getting their service“right”forthe US,instead of scrapping for every extra dollar of GMV in theshort-term to reassure investors.Ultimately this approach appears to have allowed them tostrengthen th

167、eir US business enough to truly capitalise on theopportunity that COVID laid before them.That is disciplined and rational management.USD284m in GMV for a quarter is still small for the US but the rate ofgrowth,even during COVID,suggests that the hard work has been doneand Mercari has cracked how to

168、build their business in the US.The rest is just a matter of pushing through and continuing toscale.The company also has its built-up know-how from the domesticJapanese operations to support US growth.Importantly,this is not a one-way street and we believe Mercariengages in a true exchange of ideas b

169、etween the regions to ensurediffusion of best practices.Mercari Our Ten Bagger Call Is Actually Starting to Look Somewhat SaneMio Kato26We believe this result should generate a complete re-rating of the stock.Most Japanese companies can only succeed in Japan.We believe this result provides very stro

170、ng evidence that Mercarican succeed in the US.If they can succeed in the US,they can succeed in other countries.It is a big world.We have also suggested that C2C E-commerce can eventually eat theB2C E-commerce market.This is because we feel that cultivating supply in C2C is difficultand time-consumi

171、ng.We also feel that once you have a network advantage on thesupply-side,the barriers to entry are much higher than with othernetworks.Pricing knowledge,packing and delivery and trust aremore important than usual and the business is effectively O2Ofrom the onset.We believe Mercaris newly articulated

172、 data strategy is a furtherarrow in that quiver offering manufacturers a very valuableincentive to favour Mercari over traditional E-commerce.Are we willing to say that Mercari will eventually eat Amazonslunch?No.But we arent willing to say that they definitely cant.And how many companies are there

173、which fall in that category?Mercari Our Ten Bagger Call Is Actually Starting to Look Somewhat SaneMio Kato27Japan Business Looking SpryMercaris GMV growth bounced back to+40%YoY in Japan.We had been concerned about some slowdown,but we would note thatMAU has been steady in its rise.What we had been

174、concerned about was a pause in a previously steadilyrising trend also apparent in average spend.Mercari Our Ten Bagger Call Is Actually Starting to Look Somewhat SaneMio Kato28This trend appears to now have returned towards our modeledtrajectory and while it is probably inflated by COVID,even accoun

175、tingfor a slight correction going forward,we expect growth rates to movefrom about 40%towards just over 20%over the next two years.The current 42%OPM for Mercari JP could be difficult to sustain,butwe believe a low to mid-30s margin is very achievable.Mercari Our Ten Bagger Call Is Actually Starting

176、 to Look Somewhat SaneMio Kato29Can this go to 26,850?On 30thSeptember 2019 we wrote:“We believe Mercaris Japanese flea market operations could generateabout 15.0-17.0bn in adjusted OP in FY06/20.A 20 x multiple on thatwould imply 300-340bn which is in-line with Mercaris current EV of322bn.We believ

177、e that Mercari is currently being valued for itsdomestic business with potentially a small discount for the loss-making US and Merpay businesses.This view may change if continuedmomentum is demonstrated in the US.An EV/Sales multiple of 6-7xwould certainly not look particularly high relative to Merc

178、aris growthprospects and relative to peers so we believe there could easily be30-40%upside in the name.That is the short-term upside.Longer-term,however,if Mercari doesindeed crack the US market it would position itself as the firstJapanese software company to have the potential to become the truegl

179、obal leader within its space.It would likely enjoy strong support notjust from overseas investors but also for domestic investors lookingfor not just growth,but global growth outside of manufacturing.Thereare a few other names which could potentially fall into this bucket suchas Fast Retailing and R

180、ecruit Holdings but the list is not long.“Mercari Our Ten Bagger Call Is Actually Starting to Look Somewhat SaneMio Kato30Given the attention paid to companies of that nature and the premiummultiples investors pay for them,and the fact that Ebay is a USD32bnbusiness with what we would argue is a wea

181、ker and more outdatedbusiness model,is there any reason why Mercari cannot become a 10bagger?If they can execute in the US we do not think so,and while thatremains a question mark at present,the underlying signs are good.Wefeel the risk-reward is best before that question has been answeredclearly an

182、d given the combination of reasonable valuations and hintsof momentum,we believe now is a good time to get involved.”In the end Mercari generated 18.3bn in adjusted OP in Japan andappears to have taken a very big step towards establishing credibility inthe US.The stock is now at 4,660 and that puts

183、it at a 648bn EV.We believe that Mercari is on track to generate revenue of close to100bn from the Japan flea market business in FY06/22.The US business is much less certain and Mercari is targeting 50%GMV growth next year,but if they can compound GMV at about100%a year,they could get close to 30bn

184、in revenue for the US.To get to a ten bagger it would need a 32x EV/Sales multiple evenon those numbers,so that is still out of reach for the moment.However,assuming a 10 x EV/Sales multiple on the Japanese fleamarket business and assuming the market doubles that for thepotential of the US/potential

185、 global expansion,that would get youto 2.6trn or an implied share price of 17,230.There is a lot ofupside left here as long as the company can keep executing.Disclosure&CertificationI/We have no position(s)in the any of securities referenced in this insightViews expressed in this insight accurately

186、reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law

187、 as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.

188、Mio Kato(06 Aug 2020)Mercari Our Ten Bagger Call Is Actually Starting to Look Somewhat SaneMio Kato31Rakuten Inc|Equity Bottom-UpRakuten:CoreBusinesses Are DoingWell but Logistics andMobile Investments AreEating into ProfitsBy Supun Walpola|18 Aug 2020EXECUTIVE SUMMARYRakuten Inc(4755 JP)s 2Q FY20 f

189、inancial results did not carry any majorsurprises.Similar to its counterpart Z Holdings(4689 JP),which reported itsJune quarter results in the previous week,Rakutens shopping business didwell on the back of strong stay-at-home demand,which offset the negativeimpact of service DEC businesses like Rak

190、uten Travel due to COVID-19.Onthe OP front,Rakuten missed consensus by around 22%,however,this wason the back of upfront investments in mobile and logistics operations.We continue to prefer Rakuten among other Japanese e-commerce names,aswe believe its strategy of improving monetisation of its exist

191、ing users andincreasing penetration into untapped markets through logistics expansion,better suits the maturing Japanese e-commerce market.We believe Rakuten,excluding its mobile and logistics businesses,is undervalued,however,wedo not see any short term catalysts that would drive Rakutens share pri

192、ceup,especially as we expect Rakuten to continue making operating losses inthe next two years as the company continues to invest heavily on its mobileand logistics operations.However,we like Rakuten for its long-term growthpotential and expect further upside once investments in mobile and logisticso

193、perations start making meaningful contributions.DETAILRakuten reported its 2Q FY20 financial results last week(11/08/2020).Revenue was on par with consensus,but OP was 22%lower thanconsensus.The market reacted negatively for 2Q FY20 results as theshare price has fallen by around 9%since last Tuesday

194、.Rakutens domestic e-commerce(DEC)business revenue increased by14.1%YoY in 2Q FY20(cf.19.4%YoY in 2Q FY19 and 14.8%YoY in 1QFY20).However,we believe,this alone does not give a clear picture ofhow Rakutens e-commerce operations fared in the last quarter.Rakuten:Core Businesses Are Doing Well but Logi

195、stics and Mobile Investments Are Eating into ProfitsSupun Walpola32Supun WalpolaEquity Analyst|LightStream ResearchEquity Analyst covering Asian tech and internet stocks.Over 5 years of experience in investment research covering multiple industries including internet media/advertising,e-commerce,clo

196、ud,payments,and fintech.Areas of Expertise Primary Asset Class:Equities Geography:Asia Pacific Countries:Generalist Sectors:GeneralistContent Verticals Equity Bottom-Up,Forensic AccountingRakutens overall DEC business GMV increased by 11.8%YoY in 2QFY20.However,as per Rakutens financial results pres

197、entation,itsshopping DEC business GMV increased by 48.1%YoY in 2Q FY20,driven by the strong stay-at-home demand.This suggests thatRakutens non-shopping DEC GMV,which includes the likes of RakutenTravel,would have declined significantly during the last quarter,mainlydue to the negative impact of COVI

198、D-19(Rakuten does not provide amore detailed breakdown of its DEC GMV).Rakutens e-commerce counterpart,Z Holdings YoY Shopping GMVgrowth had fallen back to the pre-pandemic level in July(2020),from ahigh growth period in the June quarter.Therefore,it is likely thatRakutens shopping DEC GMV growth wo

199、uld also revert to the 1Q FY20level from the next quarter onwards.However,at the same time,non-shopping DEC GMV is likely to remainstressed over the next few quarters as we believe Rakuten Travel andother service e-commerce businesses may take time to recover.Webelieve this would put Rakutens DEC GM

200、V/revenue growth underpressure for the next few quarters,although,we optimistically expect afull recovery towards the end of FY21.Rakutens DEC GMV increased at a 3-year CAGR of only 5.3%overFY16-19.However,this includes a slow growth period during FY18,where YoY GMV growth was around 3.2%.Rakutens G

201、MV growthpicked up in FY19 to 13.4%YoY,on the back of increased penetrationthrough the expansion of the logistics network,and growth of itsmobile payments platform,R-Pay(although GMV growth was slightlylower in 2H FY19 presumably due to the consumption tax hike inOctober).We expect Rakuten to mainta

202、in its current growth trajectoryin the medium-term as the company continues to invest in its logisticsoperations to penetrate untapped markets.We expect Rakutens DECGMV to increase at a 2-year CAGR of 10%over FY19-21.Rakuten:Core Businesses Are Doing Well but Logistics and Mobile Investments Are Eat

203、ing into ProfitsSupun Walpola33In our previous notes,we have preferred Rakuten over some of theother Japanese e-commerce names like Z.This is mainly due toRakutens focus on improving monetisation of its existing users,asopposed to Zs strategy of aggressively trying to expand its user growthin mature

204、 cities that already has a high e-commerce penetration.Rakutens DEC business revenue as a percentage of GMV(or in otherwords the“monetisation rate”)increased from 12.5%in 2Q FY19 to12.9%in 2Q FY20.We believe this increase is due to the improvementsmade to Rakutens logistics operations(refer the extr

205、act below from ourprevious note,Rakuten:Upfront Investments in Logistics and UI/UXAre Eating into E-Commerce Margins).Under the new strategy,Rakuten introduced the Rakuten SuperLogistics service,an end to end supply chain solution for e-commerceusers,which picks up the package from the merchant,stor

206、es it inRakutens warehouses,and delivers it to the customer.The service wasexpected to boost Rakutens margins by reducing its reliance on third-party logistics providers and by adding“an extra buck”to revenuethrough fees charged from both the merchant(through both pickupand warehousing services)and

207、the customer(shipping/delivery costs)this effectively allows Rakuten to earn additional revenue pertransaction and could be another probable reason for its increasingrevenue as a percentage of GMV.That being said,Rakutens 2Q FY20 monetisation rate of 12.9%waslower than 13.4%in 1Q FY20.In our previou

208、s note,we also suggestedthat higher commission rates from service e-commerce businessescould be another reason for Rakutens increasing monetisation rate.Hence,the QoQ decrease in the monetisation rate could have been dueto the lower contribution from service e-commerce businesses such asRakuten Trav

209、el in this quarter.Nevertheless,we believe monetisationrate would continue to improve in the medium-term as logisticsoperations expands and the service e-commerce businesses recoverfrom the COVID-19 slump.“Rakuten:Core Businesses Are Doing Well but Logistics and Mobile Investments Are Eating into Pr

210、ofitsSupun Walpola34However,the DEC business OP margin continued to remain stresseddue to upfront investments in the logistics network.The DEC businessOP margin decreased by 210 bps YoY to 8.3%in 2Q FY20 and remainedflat from the last quarter(cf.14.6%and 10.4%in 2Q FY18 and 2Q FY19,respectively).Dur

211、ing the Q&A session following the 2Q financialresults presentation,the management said that the company wouldcontinue to invest in the logistics network actively in the next fewyears.Hence,we believe an OP margin improvement in the DECbusiness would be unlikely in the next two years.The Fintech busi

212、ness also had a positive quarter.Fintech businessrevenue increased by 19.5%YoY in 2Q FY20(cf.12.7%YoY in 2Q FY10),driven by double-digit growth in Rakuten Card.The segment OP marginimproved by around 60bps YoY.However,the OP margin remains belowthe 20-22%level,where it was 4-5 years ago.We believe t

213、his could bedue to higher promotional spending on Rakuten Card and Rakuten Payand expect the OP margin to remain stressed at the 13%-15%level inthe next two years.Rakuten reported a consolidated operating loss of JPY32.6bn in 2QFY20.However,this was mostly due to operating losses from the mobilebusi

214、ness,which amounted to JPY50.6bn in 2Q FY20.According to theRakuten:Core Businesses Are Doing Well but Logistics and Mobile Investments Are Eating into ProfitsSupun Walpola35company,this was due to increased depreciation from the accelerationof base station buildout and is expected to increase furth

215、er in the nexttwo years as less than half of the contracted base stations so far havebeen completed.The price cuts implemented earlier in the year alsocontributed to the mobile business operating loss.However,on the positive side,Mobile business revenue increased by61.7%YoY in 2Q FY20,suggesting tha

216、t Rakuten has been able to attracta decent number of new subscribers on the back of price cuts.Incomparison,NTT Docomo Inc(9437 JP)s mobile business revenuedecreased by 9.8%YoY during the same period and Softbank Corp(9434JP)s mobile business revenue(although from a higher base)increasedby only 3.1%

217、YoY in the March quarter(Softbank Corp has not reportedits June quarter results yet).We believe Rakutens mobile business has the potential to disrupt themarket,through cost-effective solutions while rapidly expanding itscoverage.We will do a more detailed follow-up note evaluating thepotential of Ra

218、kutens mobile business soon.Rakutens DEC and Fintech business OP was JPY32bn in 2Q FY20(+10.6%YoY)and JPY124bn in FY19(-10.2%YoY).We expect RakutensDEC and Fintech business OP to increase at a 2-year CAGR of 8.3%toreach JPY145bn by FY21.This translates into an FY+2 EV/OP multiple of just 4.0 x.Incom

219、parison,Rakutens 10-year median FY+2 EV/OP multiple is around12.6x.We believe the market is undervaluing Rakutens core-businesses.Rakuten also includes some of its investment businesses in itsconsolidated results(investments in start-ups that are reported underOther Internet Services).Other Internet

220、 Services OP amounted toaround JPY37bn and 40bn in FY18 and FY19,respectively.However,in1H FY20,the operating loss from Rakutens Other Internet Servicesamounted to 40.5bn.We believe this could be due to its exposure toRakuten:Core Businesses Are Doing Well but Logistics and Mobile Investments Are Ea

221、ting into ProfitsSupun Walpola36ride-sharing companies which was one of the worst-hit industries fromCOVID-19.We optimistically expect OP from Other Internet Services torecover to the FY19 level over the next two years(JPY40bn in FY21).Source:Company DisclosuresWe expect Rakutens FY21 OP excluding t

222、he mobile business to bearound JPY185bn(DEC and Fintech JPY145bn+Other Internet ServicesJPY40bn).Rakutens consensus FY+2 OP is JPY8bn.This suggests thatthe market is expecting a loss of around JPY177bn for Rakutens mobilebusiness.The expected loss seems to be on the lower side to us givenRakutens pl

223、ans to invest heavily in its mobile infrastructure in themedium-term.In comparison,the annualised 2Q FY20 operating lossfor the mobile business comes to around JPY202bn.Rakutens 2Q FY20 financial results did not carry any major surprises.Similar to its counterpart Z,which reported its June quarter r

224、esults in theprevious week,Rakutens shopping business did well on the back of strongstay-at-home demand,which offset the negative impact of service DECbusinesses like Rakuten Travel due to COVID-19.On the OP front,Rakutenmissed consensus by around 22%,however,this was on the back of upfrontinvestmen

225、ts in mobile and logistics operations.We continue to prefer Rakuten among other Japanese e-commerce names,aswe believe its strategy of improving monetisation of its existing users andincreasing penetration into untapped markets through logistics expansion,better suits the maturing Japanese e-commerc

226、e market.We believe Rakuten,excluding its mobile and logistics businesses,is undervalued,however,wedo not see any short term catalysts that would drive Rakutens share priceup,especially as we expect Rakuten to continue making operating losses inthe next two years as the company continues to invest h

227、eavily on its mobileand logistics operations.However,we like Rakuten for its long-term growthpotential and expect further upside once investments in mobile and logisticsoperations start making meaningful contributions.Rakuten:Core Businesses Are Doing Well but Logistics and Mobile Investments Are Ea

228、ting into ProfitsSupun Walpola37Disclosure&CertificationI/We have no position(s)in the any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This

229、insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold

230、any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.Supun Walpola(17 Aug 2020)Rakuten:Core Businesses Are Doing Well but Logistics and Mobile Investments Are Eating into ProfitsS

231、upun Walpola38Cross Asset StrategyWhat Warren Buffett Knows About Japan?Is It That Tokyo Stocks Are Now The Cheapest in 50 Years?By Michael J.Howell|01 Sep 2020EXECUTIVE SUMMARYJapanese market P/E is lower than Wall StreetMore importantly Japanese P/E adjusted for liquidity is now at itscheapest for

232、 near-50 yearsAdjusted P/Es focus on profitability and equity ownership and offer atruer guide to value,without the distortion of excess liquidityJapanese stock ownership has flatlined,compared to a doubling inthe US over two decades,whereas Japanese profitability is up ten-fold,compared to staying

233、flat in the USDETAILThe Japanese stock market is trading on a P/E multiple of 16.8 timesearnings,or slightly above its 10-year average.Japanese stocks are now attheir cheapest level,relative to Wall Street,in almost fifty years.We basethis assessment on adjusted P/E multiples that take into account

234、periods ofexcess liquidity,which distorted both the Tokyo market in the early 1980sand Wall Street in the recent two decades.Whereas US equity allocationshave more than doubled since 1990,Japanese allocations to stocks haveflatlined.Equally in the last two decades,US profitability has flat-lined,whi

235、le Japanese profitability is up ten-fold.Could this explain why legendaryinvestor Warren Buffett is now stalking Japanese stocks?What does heknow?On the face of things,Japanese stocks look cheaper than their UScounterparts based on these simple market P/E multiples.See the chartbelow.Japans market P

236、/E multiple hit over 60 times earnings at the peak ofthe 1989 stock market bubble.It then fell back,before rising to a new peak in1999.Now,in comparison at 16.8 times earnings versus the US P/E of 28.2times,Japanese stocks surely appear a bargain?What Warren Buffett Knows About Japan?Is It That Toky

237、o Stocks Are Now The Cheapest in 50 Years?Michael J.Howell39Michael J.HowellCross-Asset Liquidity Strategist|CrossBorder CapitalCrossBorder Capital is an investment advisory firm specialising in macro-investing.Founded in 1996 with an international client base,CrossBorder focuses on monitoring and u

238、nderstanding global liquidity and capital flows.Areas of Expertise Primary Asset Class:Multi-Asset Geography:Global Countries:Generalist Sectors:GeneralistContent Verticals Cross Asset Strategy,MacroeconomicsSource:CrossBorder Capital,DatastreamWhile the P/E is an accepted and often useful valuation

239、 metric at theindividual stock level,in our view it doesnt translate well at the aggregatemarket level.To see this,lets split out the components of the aggregate P/E,where P denotes the value of aggregate equity holdings;E is aggregateearnings;L domestic liquidity and GDP represents national income:

240、The Liquidity Valuation Framework:Looking Inside the P/EValuation=Stock Ownership x Excess Liquidity ProfitabilityThis equation is a key component of our liquidity-based valuationframework.In other words,the P/E multiple is made-up from three things:(1)a measure of portfolio structure(P/L,or the equ

241、ity to cash holdingsratio);(2)a measure of excess liquidity or monetary circulation(L/GDP,ormoney to GDP,i.e.inverted monetary velocity,a gauge of how much iscirculating in the financial economy),and(3)a measure of profitability,defined by profit margins as a percent of value-added.What Warren Buffe

242、tt Knows About Japan?Is It That Tokyo Stocks Are Now The Cheapest in 50 Years?Michael J.Howell40This means that a high or low P/E valuation depends on portfoliopreferences and liquidity factors,as well as profitability.The analysis canshow how the supply of assets in general,including liquidity and

243、bonds,can affect the P/E of equities.Table 1 highlights,for example,that USmarket P/Es roughly doubled in the 30 years from 1990.This comprised adoubling of all three factors:the allocations to equities,excess liquidity inthe financial economy and profit margins.Yet,for 2020,it can be seen thatthe p

244、rospective rise in the P/E is largely explained by a jump in liquidity(i.e.L/GDP),which occurs alongside weaker profitability and a lowerallocation to equities(i.e P/L).Table 1:Components of US P/EMultiple,1965-2020E(Times)P/EP/LL/GDPE/GDPMemo:P/GDP199014.50.440.932.8%0.40200025.21.191.165.5%1.38201

245、017.40.711.415.8%1.01201923.91.081.396.3%1.502020E28.20.901.785.7%1.60Source:CrossBorder CapitalThe equivalent Japanese equity data in Table 2 is even more revealing.Between 1975-89,the P/E multiple on Japanese stocks more than tripled,but profit margins were unchanged and the volume of excess liqui

246、dity fell.What drove equity prices was a massive near four-fold increase in theallocation to stocks,as measured by the equity holdings to liquidity ratio(P/L).In the next decade to 1999,the P/E multiple soared further to a sky-high 83.1 times,yet equity allocations dropped by 20%and excess liquidity

247、fell by almost 30%.The mechanism behind higher valuations was purely thecollapse in Japanese corporate profitability.In contrast,the next fewyears to 2006 saw profitability quintuple and equity allocations reach peaksof 1.02 times liquidity,but P/Es skidded lower to 26.1 times.Finally,inanother twis

248、t,by 2020,Japanese P/Es fell even further to 16.8 times.Thisperiod saw profitability rise,equity ownership nearly halves over theperiod,but the pool of excess liquidity virtually doubles.What Warren Buffett Knows About Japan?Is It That Tokyo Stocks Are Now The Cheapest in 50 Years?Michael J.Howell41

249、Table 2:Components of Japanese P/EMultiple,1975-2020EP/EP/LL/GDPE/GDPMemo:P/GDP197520.00.260.250.3%0.07198019.40.280.200.3%0.06198533.40.430.260.3%0.11198960.60.980.180.3%0.18199038.60.580.190.3%0.11199562.70.540.120.1%0.06199983.10.790.130.1%0.10200049.70.620.120.1%0.07200534.90.970.110.3%0.1120101

250、5.60.570.090.3%0.05201516.20.710.190.8%0.13201916.10.630.200.8%0.13202016.80.520.230.7%0.12Source:CrossBorder CapitalSo,where do these cross-currents leave us?Which of these factors shouldWarren Buffett be looking in order to decide whether Japanese stocks aregood or bad value?In truth,all three are

251、 important.However,as a value,as opposed to a liquidity investor(assuming liquidity is cyclical)it wouldmake good sense for Warren Buffett to remove the impact of excess liquidity(L/GDP)and focus instead on the ownership(P/L)and profitability(E/GDP)factors.The chart below shows Japanese and US equit

252、ies measured in terms of theirP/E ratios adjusted for liquidity by using the average L/GDP ratio over theperiod,as taken from Tables 1 and 2,respectively This highlights the secularfall in true Japanese valuations caused by lower allocations to stocks bydomestic and foreign investors,and the more re

253、cent structural rise inprofitability,triggered in large-part by the Abenomics-based gains.As itturns out,Japanese stocks are again relatively cheap versus an adjusted WallStreet and have only been cheaper once before in 1973,almost fifty yearsago.Its been a long wait!What Warren Buffett Knows About

254、Japan?Is It That Tokyo Stocks Are Now The Cheapest in 50 Years?Michael J.Howell42Source:CrossBorder CapitalDisclosure&CertificationI/We have no position(s)in the any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the refere

255、nced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which

256、 it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.Michael J.Howell(01 Sep 2020)What Warren Buffett Kn

257、ows About Japan?Is It That Tokyo Stocks Are Now The Cheapest in 50 Years?Michael J.Howell43Thematic(Sector/Industry)?JAPAN SomeThoughts on SugaYoshihide as PMBy Campbell Gunn|02 Sep 2020EXECUTIVE SUMMARYSource:http:/www.sugayoshihide.gr.jp/PM SUGA-In this Insight,we offer some thoughts on what appea

258、rs to bethe foregone conclusion that current Chief Cabinet Secretary and Abes righthand for the last eight years,Suga Yoshihide,will be next leader of theLiberal Democratic Party and Prime Minister of Japan.JAPAN Some Thoughts on Suga Yoshihide as PMCampbell Gunn44Campbell GunnQuantamental Japan Spe

259、cialist|LightStream ResearchFormer Japan Equity PM with over 30 years of experience,now providing database-driven analysis of the market,sectors,peer groups,and stocks for LightStream Research.Areas of Expertise Primary Asset Class:Equities Geography:Asia Pacific Countries:Japan Sectors:GeneralistCo

260、ntent Verticals Quantitative Analysis,Cross Asset StrategyAbe Shinzo has done well during his tenure to divide and rule of the variousLPD factional interest and has sought to(over-)promote allies and acolytesoften those who supported his platform of constitutional reform.Mostly dueto lack of politic

261、al acumen,none of these friends-of-Shinzo has emerged asa potential successor.Abe most fervent opponent within the LDP,IshibaShigeru,has been effectively sidelined and the rules for the upcomingelection will be written to exclude his power base within the local LDPchapters.Within the Cabinet,the mos

262、t charismatic figures are Deputy PMAso Taro(79-years old-not standing)and Defense Minister Kono Taro(57years old-possibly standing).The latter is in the formers faction,and Asohas yet to content to Konos candidature.Assuming the Suga Premiership commences on September 14th,the short-run market impli

263、cations are benign;however,webelieve that Sugas influence and control over policymakingcould have more positive longer-term implications for Japanthan anything achieved under Abenomics.DETAIL BACKGROUND Born in 1948,Suga is six years older than Abe.Their backgrounds could notbe more different.Abe is

264、 perhaps the most hereditary of Japans manydynastic politicians,and his pedigree is,perhaps,the one aspect thatappeals most to President Trump.Suga grew up in the snowbound northernprefecture of Akita in a farming family.After paying his way through TokyosHosei University to earn an LLB,he became a

265、political secretary to aYokohama Diet member and then was elected to the Yokohama localassembly,despite being an outsider.After four terms in Yokohama,he wonhis Diet seat in 1996 for Kanagawa 2 which he has held successfully eversince even during the 2009 surge to the DPJ.In 1998 Suga in his first t

266、ermdid the right thing and backed his political mentor,Kajiyama Seiroku andnot his faction leader Obuchi Keizo in the LDP leadership contest.Both hadto leave the faction after Obuchi became PM and his political futureappeared bleak but was brought into government by maverick PM Koizumi.Sugas subsequ

267、ent loyalty to PM Abe and his effectiveness in his job hasmade Suga the longest-serving Chief Cabinet Secretary in Japanese politicalhistory.Suga is well-known for his morning routine of 100 sit-ups and abrisk 40-minute walk.DOMESTIC POLICY IMPLICATIONS Suga is everything Abe is not.Most of all,he c

268、an portray himselfwithout pretence as man of the people.He was also a pioneer oftsujidachi or soap-box speeches and consults widely with interestedparties on most issues.JAPAN Some Thoughts on Suga Yoshihide as PMCampbell Gunn45We can expect a shift in policy away from constitutional reform and are-

269、emphasis on economic revitalisation in the wake of COVID-19.AsScott Foster has noted,the focus is likely to shift from public works toraising living standards,including improvements in social security,working conditions and gender equality.Abe was overly cosy with corporate Japan(e.g.FUJIFILM(4901 J

270、P)andthe Keidanren.Suga is more likely to favour SME-Japan,which has beenparticularly severely affected by COVID-19.Both the 100,000 perperson handout and the domestic travel schemes were politicallyembarrassing economically ineffective.Under Suga further rounds ofmore targeted and market-friendly r

271、elief measures are likely.It wasSuga,for example,that developed the highly-popular furusato nozeisystem,which allowed taxpayers to obtain deductions by donatingmoney to local governments.Suga has in the past criticised the mobile phone operators forovercharging,their bills taking too much of the ave

272、rage salarymanspaycheck.The market(and Mr Son)have already responded,but weexpect less predatory pricing policies in the future.Any new policieswould be of long-term benefit to Rakuten(4755 JP)as the emergingprice leader.If Suga emerges as more than a stop-gap leader,he will have free-reignto implem

273、ent more wide-ranging economic reforms and the politicaland bureaucratic skills to carry them through unencumbered by anydesire to sculpt a legacy.In the past,Suga supported his mentorKajiyamas hard landing policies in the late 1990s.We expect him tohonour Kajiyamas toughness as Japan faces an uncer

274、tain future in arapidly-polarising world.FOREIGN POLICY IMPLICATIONS Suga has much less experience in foreign policy,partly as a result of hislack of English speaking ability.Abe recently dispatched him to the USto visit VP Pence no doubt to flesh out this part of the resume.Nevertheless,Suga is the

275、 Cabinet Minister responsible for the NorthKorean abductions and is Minister in charge of Mitigating the Impactof U.S.Forces in Okinawa.The latter is a euphemism which guilds thecentral governments railroading of the Okinawa Prefecturalgovernment in all matters relating to the U.S.deployment over mo

276、st ofOkinawa Honto.As such,he has been involved in Japans two mostsensitive foreign policy issues.We expect no change in the current more hawkish approach towardsChina,although any relationship with a re-elected President Trumpwill be much more muted.Trade will re-emerge as the driving forcebehind J

277、apans foreign relations,and Abes extensive andunprecedented efforts to project Japanese soft power should becontinued under a possibly-re-appointed Foreign Affairs Minister Kono.MONETARY POLICY JAPAN Some Thoughts on Suga Yoshihide as PMCampbell Gunn46With little experience in monetary policy,Suga s

278、hould defer in theshort run to Bank of Japan Governor Kuroda whose term ends in 2023.We do,however,expect Suga to be more inquisitive as to the broadereconomic implications of ZIRP and the banks ETF purchaseprogramme,both of which has failed in their stated aims.More criticalelements within the BoJ

279、may well use any change in government policythat is directed more towards improving the lot of the ordinary workingpopulation as cover for a policy review.The result will probably be astealth tapering.With trade as a prime focus,Yen stability should be Sugas main focusbut the tools to achieve that l

280、ie mostly elsewhere.The uncharismatic Suga-san has achieved much behind thescenes in his career,and we expect that he will rise to theoccasion of standing on the main stage.He is physically fit andmentally as sharp as they go in Japanese politics.While he isthe best man for the job at hand,he could

281、surprise many byachieving more for the average Japanese citizen than his moreillustrious predecessor.Accordingly,we would view hiselevation as bullish for the economy and Japanese equities.Disclosure&CertificationI/We have no position(s)in the any of securities referenced in this insightViews expres

282、sed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this in

283、sight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any

284、of the terms specified therein.Campbell Gunn(02 Sep 2020)JAPAN Some Thoughts on Suga Yoshihide as PMCampbell Gunn47Softbank Corp|Event-DrivenSoftbank Corp A Simple SugaPM Telco TradeBy Mio Kato|04 Sep 2020EXECUTIVE SUMMARYThe Nikkei has highlighted potential risks to Japans telcos if Chief CabinetMi

285、nister Yoshihide Suga becomes Japans next prime minister as is nowwidely expected.While this trade follows on from pressure applied by Sugaover the last couple of years and is unlikely to surprise investors we believethe context is important to note and discuss it briefly below.DETAILShort Softbank

286、Long RakutenWhile Docomo is down 6.3%since Aug 28 and KDDI is down 7.9%Softbank is down just 4.4%and Rakuten is up 6.9%.Rakutens outperformance is unsurprising given its positioning asthe new entrant on whom hopes of a price war in the Japanesemobile space have been pinned by Suga/the government.Sof

287、tbanks outperformance is surprising however,especially giventhat it announced on the 28ththat parent Softbank Group wouldbe selling up to 21.6%of its outstanding shares in a secondaryplacement.We believe that over time Softbank Corp should be the worstperformer in the group and that while Rakuten is

288、 not drivenmostly by its telco business,the stock is likely to outperform.Softbank Corp is not cheap,trading 11.4x EV/EBIT.This is at the 32ndpercentile compared to its history since listingbut is expensive vs.peers.Softbank Corp A Simple Suga PM Telco TradeMio Kato48Mio KatoJapan/Asia Long-Short|Li

289、ghtStream ResearchMio Kato is the Founder of LightStream Research,and has over 15 years of experience looking at Japanese and Asian cyclically driven sectors such as Gaming,Factory Automation,and Autos.Areas of Expertise Primary Asset Class:Equities Geography:Asia Pacific Countries:Japan Sectors:Gen

290、eralistContent Verticals Equity Bottom-Up,Equity Capital MarketsDocomo,which we consider to be noticeably higher quality is trading atjust 10.7x despite the fact that the company has(perhaps half-heartedly)tried to pre-empt some of the government pressure byvoluntarily reducing pricing on some of it

291、s plans.This move was notmatched by KDDI and Softbank,preventing a price war but Docomocould be said to have made an effort potentially making it less of atarget.KDDI is trading at just 8.0 x EV/EBIT and we would argue that KDDI isalso a higher quality telco than Softbank Corp.Softbank Corp A Simple

292、 Suga PM Telco TradeMio Kato49About one fifth of Softbank Corps OP is generated by Yahoo Japansoperations so you could argue that it deserves to trade at a slightlyhigher multiple but we would argue that growth rates for Z Holdingshave been weak in comparison to peers and are inflated by COVID.Moreo

293、ver,the sale of shares by parent Softbank Group should be a verysignificant concern.Softbank Corp has courted retail investors with its high dividend yieldof 6.2%and we believe this is what is keeping the stock at elevatedlevels,perhaps 3-4 turns higher than where it deserves to trade in ouropinion.

294、The dependence on retail will likely increase following thisoffering in our opinion.This dividend yield is also important to Softbank Group which needscash flow to pay off interest on debt that it holds since Masayoshi Sonseems increasingly intent on deploying Softbank Groups balance sheetto trade c

295、all options on tech stocks though that is another discussionentirely.Given that Softbank Group has already pledged shares in Softbank Corpas collateral and is now monetising its stake further,we believe it isentirely possible that they may divest completely.If that were to happen,there would be less

296、 direct pressure on SoftbankCorp to maintain the high dividend yield.Of course,it would probablyhurt the stock so Softbank Corp would likely attempt to maintain thedividend at a high level.However,if pricing power in the telco business deteriorates that is adifferent story.Last year Softbank generat

297、ed 1.25trn in operating cash flow,had900bn in cash outflows for investment and paid 397bn individends.Investing cash flow was high due to the acquisition of acquisitions,but cash flow from operations was also somewhat inflated by“other”items.As such we do not believe there is much room for error.Sof

298、tbank Corp A Simple Suga PM Telco TradeMio Kato50Suga has suggested that mobile bills could afford to fall as much as40%.This is at the same time that Japan will be moving from a three mobilenetwork operator regime to a four mobile network operator regime.Based on some analysis of this dynamic in ot

299、her countries we believethere is significant risk to profits overall.Many countries saw mobileoperator profits halve.We do not believe the resolve of the government/Suga should bedoubted here.We also believe that Rakuten will be a very willing participant in aprice war.Of the three operators we beli

300、eve that Softbanks customer basewill be most at risk of being poached because it has traditionallycompeted on price,especially for data.Rakuten will be taking thesame approach but probably being more aggressive.In our discussions with Rakuten we have been told that Mikitanigained confidence in the a

301、bility to come from behind in the telcospace due to Jios success in India.That does not point to Rakutenbeing bashful about cutting prices.Rakuten also has relatively aggressive plans for base station andnetwork buildout,apparently powered by a lower cost approach.Rakuten has suggested previously th

302、at its 5G platform will be“true”5Gwith full virtualisation and will avoid legacy issues since it wasdesigned from the start with 5G in mind whereas other players aremigrating from 3G/4G.Softbank Corp A Simple Suga PM Telco TradeMio Kato51We do not know if the company will be able to achieve the 40%l

303、owercapex and 30%lower opex that they claim,but even coming close tothose numbers would pressure incumbents.So far customer response seems reasonable for this stage in thecompanys rollout,especially given the added difficulty of launchingagainst the backdrop of COVID.Softbank Corp A Simple Suga PM T

304、elco TradeMio Kato52It is also worth noting that Rakuten is already collaborating with thegovernment,namely METI and NEDO.Rakutens non-telco operations are benefitting from the lockdowns andare growing quickly.We believe a long Rakuten,short Softbank trade offers good riskreward.Softbank Corp A Simp

305、le Suga PM Telco TradeMio Kato53Source:TradingviewDisclosure&CertificationI/We have no position(s)in the any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as

306、 appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write thi

307、s insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.Mio Kato(04 Sep 2020)Softbank Corp A Simple Suga PM Telco TradeMio Kato54RPA Holdings Inc|Equity Bottom-UpSm

308、all Cap Growth:RPA(6572)-The DigitalWorkforceBy Mark Chadwick|10 Sep 2020EXECUTIVE SUMMARYRPA Holdings Inc(6572 JP)is the Japanese leader in the hottest area ofenterprise tech,Robotic Process Automation.Adoption of RPA in Japan is still low and there is a huge potentialaddressable market.RPAs BizRob

309、o platform has hit a growth wobble,but the larger,highermargin Robot Transformation segment is on fire.The stock trades at an 80%discount to global peers.DETAILThe MarketRobotic Process Automation is one of the hottest areas in the enterprisetechnology sector these days.Nevertheless,the market is st

310、ill fairly smallcompared with larger markets such as cloud computing.According to Gartner,the RPA software market grew 63%in 2019 to$1.4billion,the fastest-growing segment in the enterprise software market aftergrowing 60%in 2018.Globally,the top-five RPA vendors(UiPath,Automation Anywhere,Blue Pris

311、m,NICE,Pegasystems)control around 47%of the market.The market size depends a little bit on how it RPA is defined.The chart belowfrom Wikibon helps to visualize the overall space.It suggests that thetraditional“Back office”RPA market is worth around$5b,which would beconsistent with Gartners market si

312、ze growing at a CAGR of around 25%overthe next 5 years.Clearly,there is a huge opportunity and TAM beyond thatas RPA becomes more fully adopted in the front office.The potential marketthen grows exponentially if we consider digital transformation and“hyperautomation”(a market for automated decision-

313、making where systemscommunicate with each other to make real-time decisions).Small Cap Growth:RPA(6572)-The Digital WorkforceMark Chadwick55Mark ChadwickIndependent Insight ProviderOver 20 years of experience in equities and asset management in Asia and Japan.Qualified CFA with experience analysing

314、companies as a buy-side analyst.In-depth knowledge of company fundamental analysis,corporate governance and valuations.Areas of Expertise Primary Asset Class:Equities Geography:Asia Pacific Countries:Japan Sectors:GeneralistContent Verticals ESGIn Japan,the Yano Research Institute,estimates that the

315、 domestic market isworth around 15b,or$150m.A study by MIC,which RPA use in theirpresentation to investors,pegs the RPA market at around 30b,or$300m.Although Japans digital progress has lagged in the past several years,Japanese firms are being encouraged to accelerate digital transformation.Infact,M

316、ETI recognized the problem in a 2018 report saying that Japan faced a2025 Digital Cliff.The conclusion clearly stated that Japanese corporateswere far too reliant on legacy,closed IT systems and unless they fullyembraced DX,Japans economy would lose 12t/year(over 2%of GDP).What is clear,is that adop

317、tion of RPA tools in Japan is still relatively low andthere is a huge addressable market,but as with many developing softwaremarkets,the ultimate leader is not crystal-clear at this point.Small Cap Growth:RPA(6572)-The Digital WorkforceMark Chadwick56The MoatRobot Outsourcing(36%of sales):RPA Holdin

318、gs is the top rankeddomestic company servicing the Japanese RPA market.The companylaunched its BPO service robot“BizRobo”in 2010 and seems to have carvedout an early lead.There are now over 1,300 companies that use RPAsplatform,BizRobo.However,over the past year,growth seems to have cometo a shudder

319、ing halt.Recurring revenue(monthly fees from companies thatare actively using BizRobo to perform tasks)only rose 17%in the year to Feb2020.The first quarter this year was even worse,with recurring revenuedeclining 1%YoY,although the company blames Covid for disrupting clientoutsourcing expenses.This

320、 seems a little incongruous,given that global RPAcompanies seem to be doing just fine during Covid.It is exactly this sort ofenvironment helping to manage an avalanche of customer serviceinquiries,supporting a remote workforce that should be well suited forRPA.Despite the evident market tailwind,it

321、feels as though RPA Holdings issomewhat missing out and failing to hammer home its first moveradvantage.The subscription model should confer the company an importantplatform effect,whereby the RPA is able to offer new,improved products toclients that are largely tied-in.The companys presentation hig

322、hlights theroute to up-selling customers.Currently,however,some enterprise customers seem to be trading down tothe companys BizRobo Mini,which is a cheaper service designed primarilyfor SMEs.It remains to be seen whether the current lack of demand for RPAis a uniquely Japanese problem due to the lac

323、k of IT systems to enable aremote workforce.We would like to see a quick recovery in the top line overthe next couple of quarters,otherwise it would seem that RPAs moat hasbeen breached,perhaps by some of the bigger,global competitors.Robot Transformation(61%of sales):Although RPAs underlying BizRob

324、oplatform may be in a bit of a funk,the Robot Transformation segment isgoing from strength to strength.Robot Transformation utilizes RPAsunderlying RPA platform to redefine old industries using robots.RobotSmall Cap Growth:RPA(6572)-The Digital WorkforceMark Chadwick57Transformation sales grew by 49

325、%in the year ended Feb 2020 andaccelerated further in the May quarter,growing 84%.Clearly,Covid is not athreat.Currently,the big money spinner for this segment is the digital advertisingagency.RPAs digital robots work for PRESCO,an online affiliate advertisingbusiness.Prescos robots enhance the effi

326、ciency of data collection andreporting,which results in an extremely high retention rate(over 95%)foronline advertising players that utilize the Presco service.Robot Transformation has the potential to deliver strong growth for thecompany.RPA can make use of its BizRobo platform to develop innovativ

327、enew algorithms and create new tasks,processes,or operations that expandinto new business areas.So far,RPA has identified services that can helpimprove productivity in HR Recruiting,brokerage and communicationsindustries.The ManagementRPA Holdings seems to have a visionary management team with a str

328、ongskillset to grow the business,although there could be some question marksover execution.The company was founded in the year 2000 by Tomomichi Takahashi.Priorto that,Takahashi spent three years at Accenture and four years at Softbank.It is that formative experience in business and IT consulting th

329、at underpinsRPAs move into robotic automation.Responding to Japans structuralproblems of a declining workforce,Takahashi was early to spot the potentialfor a digital workforce.RPA began working on BizRobo in 2008,roughly adecade before the term“RPA”became a buzzword in 2017.Small Cap Growth:RPA(6572

330、)-The Digital WorkforceMark Chadwick58Google Trends:Robotic Process AutomationRPA Holdings listed on the Japanese Mothers market in March 2018,withthe stock debuting at around 1,500.The stock touched an all-time high justover 3,250 in June 2019,after operating profits doubled to over 900m.Since then

331、 however,the stock has slumped to around the 800 level asearnings collapsed 50%last fiscal year.Although since listing,the company has grown its top line by 4x to 10b,themarket may have been disappointed with the growth of the core robotoutsourcing business.On a trailing 12M basis,sales from this bu

332、siness havegrown from 3b to 3.7b.The profitability story is weak,with the operatingmargin slumping from 19%to 8%.This could be a timing issue given that thecompany has seen costs increase due to the initial launch of BizRobo Minifor SMEs.BizRobo Mini has now accumulated over 500 accounts(out of1,300

333、 in total),but the risk seems to be that many clients are opting for thischeaper,stripped down version.Another potential problem could be thecompanys choice of sales partners RPAs fortunes are to a certain extentreliant on the likes of ABeam Consulting and others to continue to winbusiness transformation/IT consulting projects.On the positive side,however,the Robot Transformation segment is doinge