A quick update from the trenches. We have another report published, on an eyewear retailer called JIN (3046). If you’re unfamiliar with the company, here’s the scoop: the president plans to revolutionize eyewear retailing, starting in Japan. This ambitious statement is characteristic of management’s style (dream big to win big). Do they have the skills matching the bravado? Can they shake up the industry status quo? Time will tell but I found the story fascinating. Take a look at the report.
Perceptive readers might have already noticed, but I wanted to update everyone else: our newest client report is for Onward Holdings, the apparel retailer. Along with popular domestic brands (Nijyusanku, Kumikyoku, ICB, Kiyuku), the company owns JOSEPH and Jil Sander, two brands with significant recognition in Europe. The report takes a closer look at retailing in Japan, and highlights how the 80 year old company is developing new channels and products to change with the times.
The story is straightforward: after a few tough years, sales are expected to rebound in FY02/11. The balance sheet is clean, and earlier acquisitions (JOSEPH in 2005, Jil Sander in 2008) haven’t had a chance to really contribute because of the difficult consumer economy. If the global recovery stays on-track, overseas sales could help the company turn the corner.
By the way, those trivia-hungry among you might find it amusing to learn that the name “Onward” had originated from a Christian hymn “Onward, Christian Soldiers”.
…And our new client. Very happy to report that yet another new report is available on our site, Daiseki (9783). I try not to shower praise on any of our clients, the neutrality being our trademark. Take a look and judge for yourself. The earnings are driven by the industrial production but the company has been growing its share, a classic cyclical growth company. It is already popular with foreigners but I hope our report will help to expand the audience.
I noticed the news today (thank you, morning Nikkei) that SKY Perfect (the official name is too long; TSE 9412) just decided to push out to FY03/15 (!) their target of reaching 4.3 million users for Skapa! satellite service. The original plan (as in “most recent original plan”) called for hitting that number in FY03/13. “Deja vu all over again”.
This is after the company announced in May that the earnings will collapse again in FY03/11. The reason? I am making an educated guess that they are “investing in the future”. The company is spending an amazing 30,000+ yen to acquire a user that generates 1,300+ yen in net ARPU per month (with about 15% net churn). This basically means that the customers that Skapa acquires today will start generating incremental cash flows near the end of 2012, assuming stable ARPU. In my view, it will be very difficult to sustain this ARPU over the next few years.
I have been using Skapa on and off for few years and must say that the service is somewhat lacking compared to even stodgier cable TV companies. The channels are going HD but this is rapidly ceasing to be a differentiating factor. Clear winners and losers are obvious among the channel providers and the latter will demand premium yen for their content while the former should be unable to attract incremental users. Add to this more BS channels in the near future, cable competition in urban areas, throw in future alternative viewing platfroms possibilities (HD Internet TV on your super-sized iPad?) and the sky seems less than perfect.
Investing in the future that there is none?
Trying to keep the blog more relevant… Donki sold some treasury shares on Friday, about 3.4% dilution if you were counting those shares as non-existing. Brilliant move in my view and they are not paying me to say this. Donki bought these shares back in 2008 at the average price of 1,751 yen (quoting the Nikkei). They sold them at 2,367 yen making few hundred million yen and using it to pay down the debt. Not bad.
Bloomberg quotes SMBC Friend Securities Senior Strategist (I suppose they have few junior ones too, Mini-Me Strategists) as saying “the balance sheet will get stronger, this is good but given anxious stock market investors might get concerned about the supply/demand balance and sell the shares”. He is further quoted as suggesting the sale price of 2,367 yen as a level where investors might draw a resistance line.
Sure, whatever. Idiotic comments like this probably don’t matter much anyway. The stock might be moving slightly to the downside because of a weakish comp numbers released on Friday (and updated in English on our site). Overall the story remains interesting (I am not saying the stock is a buy but talking about their business). Next year OP should grow in low teens and if they reallyfigure out what to do with Mega Donki, growth could accelerate.
In terms of financing, they probably want to raise another 15-20 billion yen. I am not sure if they are listening to this blogger but if they do, they won’t do another CB. Rather they should wait till the share price gets above 2,600 yen and do a straight equity deal, diluting by 8%-12%. That will take care of their needs and there will be no “potential dilution” hanging above. Whoever is considering to buy should probably price that dilution in.
In terms of supply/demand, I note that the margin balance is 4:1 in favor of sells so it wouldn’t appear that there is too much pressure from individuals (Fast Retailing is 2.5:1 in favor of buys). The institutional side will probably play a wait-and-see game as the stock does not appear likely to go below 2,300 or above 2,600 that easy. Shorting it right now is probably dangerous and to buy aggressively you have to believe that it is worth at least 20x PE on FY06/11 numbers (including above-mentioned dilution) which is something that people will try to assess after the earnings announcement. So the situation looks stable and maybe it is a good time to relax and read our report (we will be adding a new part on Mega Donki expansion shortly).
I haven’t been active recently, as all the good things at Shared Research overwhelmed me a bit (plus all those golf lessons to become a better salesman!). This blog will come back one day, stronger than ever! Meanwhile, we have another client report - Art Corporation, the largest moving company in Japan. Despite a bad economy and bad demographics, the company has been growing share both of individual moves and increasing its corporate relocations business.
Among its non-core businesses, trucking has been doing consistently well, driven by strong volumes of its core clients such as Nitori. The housing business is one where they really should not be - it adds absolutely nothing to the overall company value but the management feels attached to it.
The childcare business, a relatively new venture, is interesting. It is still small but growing. The president of Art Corp is a woman (she is the matriarch of the founding family) and her approach to business has been very service oriented (the service is much better compared to the competition based on my personal experience). Privatized childcare is likely to be one of the growing areas in Japan. The government is trying to improve the childcare infrastructure and daycare facilities is one of the weak points. This is where Art is trying to build its presence.
As a side note, the company has experienced a bizarre setback few days ago. Its 64-year-old chairman (and husband of the president) resigned after it had been revealed that he was criminally charged in an alleged improper sexual conduct incident involving minors. The details are probably not very relevant at this point but this unfortunate situation may damage the company reputation. I hope that it will prove a blessing in disguise by further concentrating leadership in the hands of the current president and probably causing some soul searching by the entire (family driven) management team, hopefully helping improve corporate governance.
If you have a moment, please have a read of the report, and tell me what you think.
Our newest report is on the web, it’s Start Today. The company is a fast growing online apparel retailer. One interesting point is what the shift from direct sales to consignment sales means for them (gross margins go to the Moon…). Please have a read. Oh, and check their last year’s annual report, it’s quite amusing.
We’ve got yet another report, on Japan Best Rescue (2453). The company’s main business is providing handyman and related services across Japan – they fix broken glass, small plumbing problems, locks, etc. The business model is simple and flexible: the company acts as a central advertising and call dispatching center for a network of semi-independent repair shops that actually perform the work; flexible because the company hardly has any fixed employee cost.
JBR has shown relatively strong growth in the past and it looks likely it will continue for at least 2-3 more years or for much longer if they can keep reinventing themselves. The president owner is young and ambitious but also fairly conservative in how he runs the business and willing to listen to investors. In a nutshell, interesting, fairly unique company, little known by the investment community (and yes, liquidity is low but bull markets tend to change that quickly).
Monday, Apr 26th, 2010
Categories: Markets
My attempts to keep this blog fresh has been sabotaged by a bit of intellectual malaise. Why bother commenting on individual stocks if they all seem to be following one pattern (at least in small caps), go up. The reasons why the stocks should or should not go up in the eyes of various investors probably differ. However, the fact is, on average they all go up. A look at TSE MOTHERS index highlights the point. Year to date, out of 182 constituents of this glorious index, 152 went up and only 31 went down. Furthermore, only 7 stocks went down more than 20% with one stock (some Link One Co., Ltd. 2403) halving. On the upside, 36 according to my count at least doubled of the same period, with eleven stocks more than tripling. The champion, some Shicoh 6667, the company that according to Bloomberg “develops, manufactures, and sells fan motors, vibration motors, liner motors, and its systems”, went up 815% YTD. (Disclaimer: I don’t own the stock, never heard of the company, but nevertheless am angry at myself for missing such a winner.)
What I am trying to say, is that in markets like this one, picking stocks is easy and no one should probably take too much credit for doing well. So, I feel somewhat discouraged in terms of my writing.
It is even harder to comment on the market. It is amazing how many people chose to go on live TV here and around the world and make coments about their market views. Who cares about your views?? If the market is going to correct, we will see it in the prices. So far, it has been going up. It is going up as I am writing this. Why? There are dozens of reasons, all of them you know and I know. (Hmmm.. Let me think… Better economy?? Wow, this must be a stroke of genius! Better earnings?? Nice one!.. Investment people feeling flush and putting other people’s money to play? Expanded monetary base looking to park all this fiat money?) Yeah, whatever.
So once again, may I state, this market is going up. Until it doesn’t. The charts, for believers, may or may not be saying that we are on the brink of a breakout. If it happens, TOPIX 1,200 is probably the next stop. If not… Then we’ll see. The simple truth seems to be, this is a upward trending market and on a short term basis the next day is likely to be the same as the previous day especially when the previous day was up. Unless you know better. Which most likely you don’t. Me neither.
Check out 2613 and 2533. They could be cheap. I bought a bit of both.
Good trading.
Open up a 1-year chart of Fidec (8423). Do you like the spike? Or do you think somebody just fell asleep with his finger still on a Buy button? And expect the thing to come crashing back? Possible…
Now open up a 5-year chart of Fidec (8423). Now it looks like like someone died while pushing a Sell button and just got dragged away few days ago.
First the disclaimer: I thought the story is rather cool; I own the stock and plan to own it for some time.
The story is simple: Fidec is a factoring company, helping retailers and other companies to manage their payables and increasing the cash velocity of the wholesalers by buying off their receivables. At least this is how I remember them. I met the company once a long time ago and was intrigued by the business model but felt the stock was expensive. I met them again on a sales visit few weeks back. As I went there I realized that I caught the company in a bit of a bad moment. Their president and founder just blew his entire stake not being able to meet the margin call on the loan that he took to buy a nice (very nice I suppose) house using his stock as a collateral. In all fairness, no owner would ever assume his stock would be down 90%… In any case, he lost his shares and the company became a rudderless ship. However, when I visited the headquarters, they turned out to be inside a retail store that used to be called Nagasakiya… The departing spokesperson looked a bit surprised that I did not read the press release saying that the largest client of Fidec bought the controlling stake in question and will be ushering in a new CEO.
This is where it gets even more interesting. The largest client of Fidec is one Don Quijote. With Fidec stock trading well below book, Donki seems to have got a fundamentally solid company at the very bottom of the market. Given that it seems to be responsible for 50-70% (sorry I did not do the interview, just saying from my fading memory) of Fidec’s business, the downside is probably somewhat limited. As Fidec a listed company and Donki is quite keen to maintain its much improved reputation (never ever anti shareholder by the way) and therefore would most likely simply try to make its new purchase into a strong company and help it diversify the revenue sources (reducing the risk for Donki itself). It probably would not hurt Fidec to have an implicit guarantee of its balance sheet by a formidable retailer. It’s a straightforward and simple win-win for everyone. I assume it is going to be a win for an ordinary shareholder like myself too.
We have added another new report, on Paris Miki. As some of you may know I used to cover the company long time ago and invested in it in my previous life. While we make every effort to stay neutral in our analysis, sometimes when I feel that my level of knowledge of the business allows me to state opinions, I do so if the company is comfortable with this approach. In the case of Miki, some of the analysis may seem overly critical. It is certainly not as bullish as some recent broker reports when it looks at the earnings picture and the degree of change that the company is undergoing. We hope that the report fosters debate, both among interested investors and internally at Paris Miki. Please read and tell us what you think.
I am pleased to inform you that we have yet another new report published on our site, Intelligent Wave Inc. (4847), or IWI as we call it in our report. Look at the price chart and you will see that there is something unusual. In fact, Dai Nippon Printing (7912) has bid for any number of IWI shares just before I went for the first interview with the management. Yesterday it was reported that the bid has been completed and DNP now owns just over 50% of the shares outstanding which makes IWI a subsidiary of DNP. The interesting thing, and potentially an intriguing twist for equity investors, is what will happen next. DNP likes IWI’s security product and for IWI using DNP’s clout and channels could do wonders.There are obvious governance risks related to this event, i.e. will DNP care that much about IWI’s shareholder value. However, in my view, the recent climate in Japan has been getting more pro-shareholder and that means that any developments on average should not be negative. Please read the report and if you care, share your thoughts here or in the report itself.
I haven’t been very disciplined about blogging recently and I gave excuses in my previous post. I promise that one day the posts will be coming faster than you can read them but for the moment please bear with me.
In this short post I wanted to inform you that we have posted a new client report (so far only online and only in English as we were asked to expedite the release). This time it is an embedded software company called Ubiquitous Corporation. They make middleware for embedded devices (that go inside digital cameras, MP3 players and other gadgets). Their new product called QuickBoot made both a techie friend of mine and the stock market somewhat excited. The QuickBoot is software that makes computers boot (or start up) quickly, in less than 1 second for Android based demo version.
As always, no comment on the value of the company or attractiveness of the stock from me. However, looking at the story and what this new product could mean for the company, I think I can recommend that you read the report and at least watch them. The management team has a good pedigree and a lot of international experience which makes the company somewhat more accessible to foreign investors (both the chairman and the president speak good English too).
Check them out.
Wow. It’s been few weeks since I last managed to post on this blog. Sorry about it. I got so busy that even checking the e-mail became an impossible task. It’s amazing how hard it is to manage even a small company. Things started to calming down finally so let me update you on what’s been going on.
We are almost done reworking the design of our site for small screens. I realized (don’t say ‘isn’t it obvious?!’) that many of our users check our site on their notebooks. We are a pretty inexperienced web company so we tried to say many things on our main page, making it hard to see on smaller displays. We cut it down. Check it out in few days.
We have also done the design work so that IE6 users can see the site properly. Microsoft developed the 7th version of its Internet Explorer back in 2006. But nobody cared to tell big financial companies, such as my old employer Fidelity , or pretty much all large brokers. IE6 is full of security holes. It doesn’t support javascript well. It sucks. Only about 10-12% of all Internet users use IE6. It looks however, a good chunk of that 10-12% work at banks and investment firms, our target users. Well done, Oleg. Thanks for building a network of gas stations in a country where there no cars and where residents ride donkeys.
The thing I have been working hard on was trying to increase the number of customers. I will report on the progress in a due course but let me tell you that we find a geniune interest. Companies want to talk to foreign investors. They want to be understood. They want to be valued fairly by well informed investors. We hope that you, our users, will benefit and that will bring the benefits back to our clients.
Please check our reports on the web periodically. Tell us if you see any errors or some things are hard to understand or poorly written. Tell us what’s on your mind. We appreciate your comments.
Our client Bell-Park (9441) reported the results after the close on Friday 10, 2010. The company forecast was exceeded by 5.5.% in terms of sales and 17.9% for the OP. This is pretty much what was expected, a very strong set of results.
The forecast for FY12/10 is calling for the sales growth of 19.4% and the OP decline of 21.7% for the full year, with substantially weaker 2H. I don’t want to speculate whether or not the forecast is ’conservative’ but the company has indicated before that the company normally has to assume lower margins at the beginning of each year. The reason for this is that strong unit sales (and resulting high profitability) in one year can be expected to lead to commmission rate cuts by the carriers (Softbank Mobile in case of Bell-Park) the following year. That does not mean it will happen. However, the company must assume it might happen and therefore forecast margin declines. In a similar fashion, for the unit sales growth, the company has no visibility into what will be offered to the market several months hence, especially when one talks about a new i-Phone. That’s why Bell-park has to assume that margins will deteriorate substantially and the unit sales will fall off a cliff in 2H of FY12/10.
Is the company being conservative? I am sure they will talk about it tomorrow at the results meeting but here are my few sentences. On margins (i.e. commissions), Softbank must be really keen to sustain its market share gains and to capture as many carrier switch-over customers as possible, without losing its own to Docomo and Au. That means that the incentives are less likely to be cut, in my view. This is not the company view; there is also a risk that Softbank would want to balance sales growth with its own profitability (i.e. cutting the commission rates). I personally think they will go for volume — currently there are enough profits for everyone and share gains are strategically important. On the new i-Phone, I have no direct line to Steve, but I suspect that Apple would want to continue developing the success of its wildly popular phone and that should mean new model launches in 2010.
In summary, Bell-Park’s forecasts are what they were supposed to be. They may turn out not to be conservative but mostly likely, they are. Please check our detailed report for the detailed discussion in few days. By the way, the stock is trading on 6.1x company forecast EPS.
The concept behind Shared Research Inc. reports is simple. We ask a company to pay us to summarize and connect any publicly available information on them in a single report. This comprehensive report tries to answer many of the questions that an inquisitive buy-side analyst could have about a company. We connect the information and bring it all together so that you can save massive amounts of time and move directly to building an earnings model and deciding on whether the stock might be a buy or a sell based on your criteria. We don’t give earning previews or comment on investment merits. Doing either would not be good compliance.
We don’t have to take sides for a number of reasons:
First, our clients pay us to stay objective. They realize the value of objective information and appreciate that our concept is not about yet another glossy PR brochure.
Second, we don’t rate the stock/companies so we really don’t have any place or reason in our reports to convince you of anything. We simply inform.
Third, we are paid for writing a report and for updating it. Fixed fee. No commissions or success fees. We have no material incentives to work beyond our report writing objective.
Fourth, we attribute views. When a company wants to convince you of something, we will simply report this as “the company thinks this and that…” We will not present such views as ours (see above why not). When we have a view which is ours we will state that clearly too. In this case please assume that the company may not agree with us and in most cases it is not a view that they would officially concur with.
To summarize, we are paid to tell the truth and you are paid to figure out what to do with it. Note that you are pretty free to say what you think in any client report. We believe this enhances the objectivity. Comments and questions are welcome.
I decided to help bring you the news and views on some of our client companies via this blog so in the interest of timeliness (and to reduce the number of ‘read and discard’ sound bites in our reports). The first one is Fields (the detailed report from SR Inc. is here). I almost wrote a post last Saturday, after their Q3 results meeting on Friday, but got too busy. Today I went to visit the company for a regular quarterly update and feel kind of glad I did not do anything on Saturday. Here’s why.
Q3 numbers looked very weak to the uninitiated. Big loss, pretty much no sales, looks ugly (details in the report already). However, the numbers were not much worse than expected, Q3 was always supposed to be ‘all costs and little sales’. It was somewhat weaker than it could have been due to a delay in Shimizu-no-Jirocho launch but that’s about it.
The results meeting left a pretty somber impression on this blogger. President Oya was frank and detailed in his discussion but somehow he came across (to me at least) as admitting to a deteriorating market and saying that making the full year number became more challenging. He didn’t say it would be more challenging, instead he used the words ‘we have no savings left’. I guess reading between the lines is something one does automatically after a decade on the buy side. So I thought, I have to write ‘it is getting worse’ piece.
However, my visit today changed my perspective substantially. The company is very confident they will make the numbers. The market is not deteriorating beyond anything they already expected and accounted for. Fields is in no trouble. The company is confident about two new pachislot titles, one Eva and one machine from Rodeo which name has not been yet officially released but it starts with O. Fields also has some possible slack in SG&A that is sometimes called in Japanese a ‘baffa’. It is not an official statement but more the company pointing to a somewhat exalted Q4 implied SG&A budget and saying that they may not need to spend that much. Speaking of next year, the company remains very positive and optimistic about its pipeline and indicates no intention of revising mid-term targets.
In any case, any gloominess and change in sentiment that were sensed by yours truly were flatly refuted/confuted/everted/disputed/rebutted. Make of it what you want, but this was what I brought home today. I still feel that Oya-san sounded a bit gloomy but maybe he was just tired or the mic was not working properly. Please note that neither I nor Shared Research Inc. take any sides in this. Believe what you want. I am not working for your commission or Fields’ for that matter.
I am planning to blog about why and how we stay objective despite being paid by the client companies soon. Check it out.
I am happy to inform you that yet another client report has been released on our site. It is Novarese (2128), a company that operates wedding halls. As always, we attempt to explain the business and growth prospects to you without taking sides. To make conclusions is up to you.
The company released their full year numbers on January 29th but the results meeting took place last Friday, February 5th. We will be updating the report in the next few days to reflect what was said at the results meeting but here is a short summary. The full year estimates look weak (sales up 8.5% YoY but OP up only 4.5% YoY; 1H sales down 3.9% and OP down 41.4%). However, the president suggested quite strongly that the numbers were conservative. Specifically, their pricing assumption is based on bearish expectations for average spend, something they have yet to see materialize. Also, recent orders are quite strong and that should mean acceleration from summer. Hence, it looks like 1H could be not as bad and 2H could be quite a bit better.
As Novarese is our client I will not comment on what I think about the stock. I must highlight that it is very illiquid. The management is very keen to change that, planning a TSE1 listing.
One opinion I want to venture at a risk of being accused of biases is the management. Of many companies I have met over the years, the CEO Mr. Asada is one of the most aggressive about getting things right. He is focused on growing his young company and he is a good presenter. I was very impressed by his handling of the results meeting last Friday – fast paced, informative, to the point. There were no foreigners at the meeting and I think this is a shame. Learn about this little company (now that you can thanks to our report) because you will be hearing more about them.
Click here to read the report.
I am very happy to report that we just cranked out yet another detailed report, this time on Bell-Park (9441). It’s our client, so I can’t comment on investment virtues. Bloomberg tells me the stock is trading at around 4x PE (the PBR is about 1.4x for >20% ROE). As far as we could conclude, there is nothing wrong with the company that would justify a major discount. The company is dependent on SoftBank Mobile, that is true (Coca Cola bottlers are dependent on Coke, it does not make them bad businesses, quite to the contrary). If you think the Softy will blow up and die then Bell-Park may not be your cup of sake (people bet on Softy’s demise before, and so far it has shown that it’s the real thing). Otherwise, maybe you should take a look at Bell-Park. President Nishikawa is keen to talk to investors. He thinks he has a story to tell. Look at the report. Tell us what you think.
I have been going around doing sales visits to companies that I used to invest in. One message/question from many companies that has been pretty consistent is, ‘do we really need foreign investors’? Japan has always had an unusual relationship with the West (and the ‘foreign investors’ are the ‘West’ in the context of the equity market), a mix of fascination and apprehension. While I am not sure if fascination is what corporate Japan feels towards overseas investors, the interest is certainly there. However, apprehension, which to an average institutional investor may seem irrational, is almost palpable. Foreigners complain and cry ‘irrelevance of Japan’ but as long as the country continues to be one of the largest and most liquid markets in the world, they are and will be coming back. So, do the Japanese companies need foreign investors and should they care? I will continue trying to convince them that they should. What do you think?
They did it! Again. As long as I can remember, Hogy would always come up with those small downward revisions. Still growing but not as fast as promised. I will calculate how many times they did it in the past 10 or so years. My prediction is 3-4 times. Historically, this is when you buy because it is cheap when people are disappointed, just a bit, and bored too. Another observation is that you sell Hogy after salespeople (more than one) start calling you on it… Worked in the past.. The beauty of this stock is that there is no rush, no sweat. Little glory too but whatever is there is yours if you are cynical enough.
Have you ever heard of Yuken Kogyo (6393)? Me neither, I came across it through a random screening. But the chart movement looked so promising and interesting to me that I decided to mention it (disclosure: I bought few shares just for fun). To me, it looks classic (check the daily chart, not the one below) — a big “here comes death” drop, a quick pickup, treading water, then the volume starts rising, tries to go up again on higher volume, stops, volume picks up again then explodes producing strong price action. Meanwhile, those dramatic events barely register on a 5-year weekly chart, however the volume increase becomes visible. Could this be good, or the charts don’t work? Wanna vote?
My first stock highlight of the year is Hogy Medical (3593). While the company is covered by plenty of analysts, the majority of them thinking it’s a Buy, the shares have been a weak performer. Lack of convincing growth is one likely reason. Fairly rich valuations and lack of immediate catalysts could be others. What drew my attention however is a weekly chart going back 10 or so years. Assuming the company has not got any worse (at to the best of my knowledge it has not) and the earnings story has not changed much (I don’t know that but again sort of doubt it), the recipe for investing in Hogy seems to be, buy at 4,500 yen (or if you are really quick, a bit cheaper), then sell at 6,000 yen. Obviously, the past is an unreliable predictor of the future but if it worked about 10 times over the last 10 years, who knows, maybe it will again?.. (Disclosure: I am curious and just bet my money on it.)
I would like to wish all my readers a wonderful 2010! 2009 was a challenging year for many of us. It was definitely a very challenging one for all of us at Shared Research Inc. and for me personally. I am glad to report that we are still here and you are very likely to see and hear more this year. Shared Research finished 2009 with 12 client companies and we are infinitely grateful for their patronage. (You can see only 7 finished reports, we are working on others). We will try to at least triple that number in 2010. More importantly, we are about to reveal the renewed version of our website very shortly. This event has been delayed by few months but hopefully, it was worth the wait.
The new site will make it very easy to write a report, or simply to leave a few notes on any listed company in Japan. Despite early skepticism expressed by of some of you, I strongly believe that sharing the fundamental information on small caps (and not only small caps) is the way of the future for the smaller investment firms with limited research resources. You need to give in order to get and the basic fundamental information is one thing that everybody has and everybody needs but we all tend to own different pieces of the puzzle. Only those investors who believe they possess all the pieces would not be interested in what we offer. Others should. It simply makes sense. We invite you to level the playing field and benefit from the process early on.
Happy New Year.
I was pondering on something really deep to write about (like how traditional retail brokers survive with their obnoxiously high commission rates when ultra low commission opportunities are so abundant*). Instead I noticed a stock that I am kind of nostalgically curious about. The Arrk Corp (7873). Some of you may remember how popular this stock was. They currently are suffering crippling losses that resulted at least partly from their incredibly aggressive and misguided worldwide M&A forays. Will they survive? The balance sheet does not provide immediate clues — lots of fixed assets supported by lots of debt (mostly short term). I remember that they had a good core business, that is what made them so popular in the first place… How are the mighty fallen!
*The answer to this question probably mostly lies in inertia.
I am happy to report that we have released a client report on Don Quijote (7532) on our site. This is our most comprehensive piece of work to date. The company is at an inflection point and we attempted to highlight its evolution and provide clues to where it might be going. Don Quijote management is very keen to emphasize that the company investors knew in the late 90s and the current Donki are two very different things. So rather than simply comparing sets of data, we would encourage readers to understand the Don Quijote of 2009 and imagine the Don Quijote of 2015. Comments and edits (it is easy!) are welcome.
Our client report on Don Quijote (7532) is finally about to be published and I will inform you when it happens. Today I simply wanted to comment on the corporate bond issue announced by the company. The company is our client and nothing I say should be construed as an investment opinion or an attempt to influence an investment opinion. I do not own any shares in the company.
Don Quijote announced today a bond issue of 11bn yen (2012 maturity, 1.47%). They just did a shelf registration for 50bn yen worth so this is a routine capital raising operation. I have been of an opinion that the company was hurting itself by issuing CBs in the past because CBs (at least in small-mid caps) tend to put a lid on the share price performance beyond the theoretical dilution models. Maybe somewhat controversially, I am an advocate of straight equity issues with small (8-12%) dilution. These things tend to upset existing shareholders for a very short period of time, the the share price normally rebounds. A company can come to the market every 2 years or so as long as they demonstrate that the return on the money raised is higher than the cost of equity. Yamada Denki used to a lot of that in the the late ’90s – early ’00s as I recall.
Don Quijote has been a somewhat uninspiring performer over the past few years (pull out the weekly chart). I always tried to argue to management that their capital raising policy may be partially responsible. Are they are going to listen this time? We’ll see. What would be the right level for Donki to use direct financing?
Comments are welcome.
Noticing that Fidelity Investments where I used to work many years ago, is buying/holding high flying Internet names. First it was CyberAgent (4751) where the recent filing shows 13.81% ownership, now I also notice that Start Today (3092), an Internet apparel shopping mall, is also loved by the F. (9.53% position reported). Add to that a modest 4.44% stake in Rakuten (4755), 8.8% one in Kakaku.com (2371), 6% in Zappallas (3770) and you get a feeling that at least some people at my old shop are bulled up.
I am reminiscing the old good days when trying to convince PMs there to buy high multiple stocks was a guaranteed way to get that “oh, this boy clearly lost his way” look. What has changed and why stocks trading at double digit PBRs and PERs that remind you of the age you can live into if you behave, are attracting Fidelity PMs and other err… investors? Growth? But isn’t it reflected in the multiples?.. Well, I hear that CyberAgent’s blog service is finally breaking even. Cool. Blog service for a fee in this age of free? Why not. Will my blog be profitable one day?.. I digress.
Went to see Furuya Metal (7826) today to try to get them on our site. They didn’t think a report explaining what they do would immediately benefit them. Can someone explain to them why it is good to have more people learn about you if you are a listed company? I wasn’t able to get the message across. Meanwhile, the management is quite friendly and willing to meet investors. It’s a bit odd that they don’t feel like spending on IR.
It is a good company, though and I would encourage anyone who can visit them. Furuya had a rough year this year but seems to be recovering quickly driven by the demand for hard disks. Their technology is quite promising for LED lighting too. They specialize in processing rare earth metals that few people cared about in the past – hadn’t been a lot of competition. Now Furuya seems to have enough of a technological advantage to be worth some investor attention.
I don’t know if the stock is a buy (I do own few shares, although their IR policy made me rethink that). It would not strike you as cheap at 5.4x PBR (last FY; Source: Bloomberg). They lost money last year, and the stock is illiquid despite a respectable 26bn yen market cap. It is covered by a trio of Tokai Tokyo, Ichiyoshi, and Tachibana which suggests that they’re not a household name among foreign investors.
Maybe it should be.
If you meet them, tell them that you want to learn about them and would like to see our report on them. We think they deserve a look.
A friend highlighted a link to a presentation by Pershing Square Capital Management, L.P., an outspoken hedge fund (thanks Jamie!). While not specifically interested in US REITs, I thought that the fact that this presentation is available on the net is a remarkable testament to the potential of what we are trying to do – share your fundamental views, whether or not you have a position. Explaining company business or industry trends is not an invitation to buy or sell in and by itself. As an investor, one takes a view hoping that at some point other market participants share that view. Letting people know may accelerate that process. Or alternatively, help convince oneself that the view fails to impress others. Both outcomes are net positive. Holding the analysis to oneself as ‘proprietary’ works only as long you don’t have a position yet. And if you have a view then why don’t you have a position??
