japan’s misguided matryoshka m&a

INTELLIGENCE. INDEPENDENCE. INTEGRITY. www.analogica.jp

Japan’s misguided matryoshka M&A

Corporate altruism does not lead to much needed innovation

Michael Newman President & CEO

Analogica KK

9th December 2015


Intel has made more

money in the last 25 years than Japan’s

biggest 20 tech giants combined

Toshiba & Fujitsu PC

merger?

Let’s start with a cautionary tale.

Intel vs. Top 20 Japanese tech giants – over 25 years which made more profit?

In the last 25 years, Intel Corp on its own has managed to make 31% more net income than all

20 of Japan’s largest tech companies combined on a currency adjusted basis. That is right. Intel

on its own has thumped the likes of Sony, Panasonic, Toshiba, Sharp, Mitsubishi Electric, NEC,

Hitachi, Fujitsu, Fuji Film, Konica Minolta, Brother, Nidec, Kyocera, Canon, Olympus, TDK, TEL,

Ricoh, Advantest and Nikon combined. Intel does one thing very well, commands huge market

shares and ensures its product is needed in pretty much most electronic devices that matter. Still

many Japanese electronics companies are stuck in highly competitive segments where even

foreign brands like Samsung are no longer sneered at. Still corporate Japan thinks matryoshka

style mergers are key to survival although history on many occasions has proved otherwise.

Source: Company data, Custom Products Research

Toshiba & Fujitsu PC tie-up?

The latest news is that scandal plagued Toshiba is in talks with Fujitsu to merge their loss making

PC units where the two share 6% of the global market. There is a lot of precedent suggesting

that this is a fruitless exercise. As one of my colleagues put it best, “two drowning men together

don’t make a swimmer”. One would hope that Toshiba’s revived sense of corporate governance

would see the majority independent director led board seek more severe action.

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Fig 1 :Intel vs Japan's Largest 20 Tech firms in the last 25 years (US$mn Net Profit)

http://nebula.wsimg.com/91e49e9a15c01a3ee6e80527c835105c?AccessKeyId=5758D7F51D80D7BC0E2A&disposition=0&alloworigin=1


Consolidation didn’t work for

Japanese handset makers

Smartphones have left

Japanese handset

makers in the dust

Source: Gartner, Custom Products Research

Lessons from the mobile handset maker mergers in Japan

Japanese mobile handset makers have consolidated. Toshiba teamed with Fujitsu (surely a

lesson in what a poor decision that has been), NEC with Casio and Hitachi while Sony (albeit

teamed with Ericsson until they merged) has had a rear guard action. Sanyo sold its handset

business to Kyocera and Mitsubishi Electric quit altogether in 2008. I remember a time when

Japanese clam-shell phones were amazing. Friends from foreign lands would marvel at the

designs, light weight and features versus the clunky Nokia and Motorola offerings of the time and

were stumped at how these devices could get so much battery life. Alas, Japan kept them largely

from overseas markets leaving them without profitable scale efficiency via expansion abroad.

Source: Gartner, Custom Products Research

As smartphones have caught on, Japanese handset makers have been left further in the dust.

Sony has the highest global share among Japanese brands at 1.7% (Q1 2015) but even when

looking to the domestic market, Apple and Samsung command the leading shares. Japanese

makers’ market share in mobile phones globally has slid from 15% a decade ago to less than

4% in 2012. We saw flat screen TV shares of Japanese makers slump from 45% to around 20%

over the same period so what magic can a Toshiba-Fujitsu PC alliance make?

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Fig 2 : Global PC Market Share (%)

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otorolaLG

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2013 24.6 8.3 13.9 3.7 3.8 2.9 2.7 0.7 3.3 2.1 1.4

2014 20.9 10.2 9.9 4.5 4.0 3.8 3.4 3.0 2.9 2.0 2.0

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http://www.economist.com/news/business/21606845-electronics-companies-japan-are-starting-turn-themselves-around-they-are-shadow


Nokia’s Elop memo should be mandatory

reading for the tech sector in

Japan

Platform on fire

Unexpected decision

Multiple explosions

Intense

competition

Apple

Android

China’s speed to

market

2 years to overtake us

Complacency is a killer. Nokia’s story should be read be all Japanese CEOs

Take Nokia’s then CEO Stephen Elop’s “Burning Platform” memo to staff. It is worth reading in

its entirety because it points straight to the heart of Japan’s woes. In essence Elop had to send

a warning shot across the bows of his own company to wake them up to the imperative to

innovate or die.

“There is a pertinent story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire. In mere moments, he was surrounded by flames. Through the smoke and heat, he barely made his way out of the chaos to the platform’s edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters.

As the fire approached him, the man had mere seconds to react. He could stand on the platform, and inevitably be consumed by the burning flames. Or, he could plunge 30 meters in to the freezing waters. The man was standing upon a “burning platform,” and he needed to make a choice.

He decided to jump. It was unexpected. In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times – his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a “burning platform” caused a radical change in his behaviour.

We too, are standing on a “burning platform,” and we must decide how we are going to change our behaviour.

Over the past few months, I’ve shared with you what I’ve heard from our shareholders, operators, developers, suppliers and from you. Today, I’m going to share what I’ve learned and what I have come to believe.

I have learned that we are standing on a burning platform.

And, we have more than one explosion – we have multiple points of scorching heat that are fuelling a blazing fire around us.

For example, there is intense heat coming from our competitors, more rapidly than we ever expected. Apple disrupted the market by redefining the smartphone and attracting developers to a closed, but very powerful ecosystem.

In 2008, Apple’s market share in the $300+ price range was 25 percent; by 2010 it escalated to 61 percent. They are enjoying a tremendous growth trajectory with a 78 percent earnings growth year over year in Q4 2010. Apple demonstrated that if designed well, consumers would buy a high-priced phone with a great experience and developers would build applications. They changed the game, and today, Apple owns the high-end range.

And then, there is Android. In about two years, Android created a platform that attracts application developers, service providers and hardware manufacturers. Android came in at the high-end, they are now winning the mid-range, and quickly they are going downstream to phones under €100. Google has become a gravitational force, drawing much of the industry’s innovation to its core.

Let’s not forget about the low-end price range. In 2008, MediaTek supplied complete reference designs for phone chipsets, which enabled manufacturers in the Shenzhen region of China to produce phones at an unbelievable pace. By some accounts, this ecosystem now produces more than one third of the phones sold globally – taking share from us in emerging markets.

While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. At that time, we thought we were making the right decisions; but, with the benefit of hindsight, we now find ourselves years behind.

The first iPhone shipped in 2007, and we still don’t have a product that is close to their experience. Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes. Unbelievable.


We are too

slow

Symbian not competitive

Fighting with the wrong weapons

War of ecosystems

Ratings agencies

cutting outlook

Brand preference

slipped

We’ve poured

gasoline on our own platform

Must shift behaviour

We have some brilliant sources of innovation inside Nokia, but we are not bringing it to market fast enough. We thought MeeGo would be a platform for winning high-end smartphones. However, at this rate, by the end of 2011, we might have only one MeeGo product in the market.

At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America. Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. As a result, if we continue like before, we will get further and further behind, while our competitors advance further and further ahead.

At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, “the time that it takes us to polish a PowerPoint presentation.” They are fast, they are cheap, and they are challenging us.

And the truly perplexing aspect is that we’re not even fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis.

The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem. This means we’re going to have to decide how we either build, catalyse or join an ecosystem.

This is one of the decisions we need to make. In the meantime, we’ve lost market share, we’ve lost mind share and we’ve lost time.

On Tuesday, Standard & Poor’s informed that they will put our A long term and A-1 short term ratings on negative credit watch. This is a similar rating action to the one that Moody’s took last week. Basically it means that during the next few weeks they will make an analysis of Nokia, and decide on a possible credit rating downgrade. Why are these credit agencies contemplating these changes? Because they are concerned about our competitiveness.

Consumer preference for Nokia declined worldwide. In the UK, our brand preference has slipped to 20 percent, which is 8 percent lower than last year. That means only 1 out of 5 people in the UK prefer Nokia to other brands. It’s also down in the other markets, which are traditionally our strongholds: Russia, Germany, Indonesia, UAE, and on and on and on.

How did we get to this point? Why did we fall behind when the world around us evolved?

This is what I have been trying to understand. I believe at least some of it has been due to our attitude inside Nokia. We poured gasoline on our own burning platform. I believe we have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven’t been delivering innovation fast enough. We’re not collaborating internally.

Nokia, our platform is burning.

We are working on a path forward — a path to rebuild our market leadership. When we share the new strategy on February 11, it will be a huge effort to transform our company. But, I believe that together, we can face the challenges ahead of us. Together, we can choose to define our future.

The burning platform, upon which the man found himself, caused the man to shift his behaviour, and take a bold and brave step into an uncertain future. He was able to tell his story. Now, we have a great opportunity to do the same.

Stephen.

It is an exceptionally powerful message. No doubt the majority of Nokia’s employees

acknowledged such candour from their leader. It proves that high market shares are not always

defendable in the face of innovative new products. Complacency is a killer.


Societally much to praise in

Japan

For listed business not

much to praise

Elpida went bust

Renesas trades at

10% of its all-time peak

Is it misguided altruism that pervades among Japan Inc?

There is much to love about Japan’s selfless dedication to the preservation of its citizens. I’ve

often held that Japan is not capitalism with warts but communism with beauty spots. However

this misguided altruism sometimes leads to a situation much worse for the overall group than

were it surgically removed. Better an end in horror than horror without end.

If we look realistically at Toshiba’s new found energy to resuscitate economic fortunes and show

a clean face on corporate governance with a majority of independent directors, how can one

possibly believe that things will change when they look to embark on a carbon copy strategy in

PCs which is failing so dismally with the tie-up in mobile phones?

Elpida Memory (cynically dubbed Hinomaru Semiconductor) was a typical Japan Inc merger

putting into one basket the ailing DRAM businesses of Hitachi and NEC in 1999 adding Mitsubishi

Electric’s DRAM business in 2003. The company listed in 2004 and went bankrupt in 2012 with

debts in excess of $5.5bn and acquired by Micron Technology in 2013 for around $2bn. Elpida

had 18% market share but the pricing of DRAM became so commoditised that the company

became more famous for capital raisings than it did from making inroads on the competition.

Source: Custom Products Research

Renesas (6723), a merger of Hitachi and Mitsubishi Electric in 2003 formed with NEC Electronics

in 2010. Since that time the company has lost money nine out of 13 years with an aggregated

net loss since listing of ¥509bn. While profitability was achieved in the most recent year it remains

a question of sustainability. Renesas currently trades at a measly 10% of its peak price reached

some 12 years ago and how poorly the market has evaluated the strategy, Fig.7.

Source: Consensus estimates, Company data, Custom Products Research

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Japan Display 60%

off its high

3.6% OPM for 30%

global share

Sysmex 40% global share

It begs the question whether Japan Display (6740) a LCD technology JV between Sony, Toshiba

and Hitachi was set up in 2012 will be any different. Net income in FY17 is estimated to hit ¥24bn

almost ¥10bn below its FY14 peak. Japan Display (JDI) was reported in the Mainichi newspaper

on December 3rd to potentially merge Sharp’s ailing LCD business. It is unclear what parts of

Sharp that JDI would be required to swallow and how much government pressure is being

exerted to consummate it. The likely deal is being lauded as helping JDI reach 30% global share

nearly double its nearest competitor LG Display at 17%. It throws up the obsession of market

share versus profitability. We note that the Korean manufacturer has outperformed JDI by 52%

since its listing on a currency adjusted basis.


Market share vs. profitability

The general view is that companies should have sustainably higher margins when dominant

market share arises because of the economies of scale. A look at Fig 8 reveals JDI’s projected

operating margin in FY16 is only 3.6%, hardly an achievement for 30% global share. Apple is the

largest customer of JDI and it is clearly exerting its influence over the company’s ability to eke

out higher margins. Many sell side analysts have appealed that having Apple as a customer is

a good thing. The list of suppliers which have suffered margin compression is long.

Sysmex (6869) is a good example of a Japanese corporation taking a 40% global market share

in hematology testing equipment and converting it to superior margins. A weaker yen has helped

the company which exports nearly three-quarters of its business.


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Fig 8 : JDI vs LG Display OP Marg in (%)

JDI LG Display

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https://www.sysmex.com/us/en/Products/Hematology/Pages/Sysmex-Hematology-Overview.aspx


Hoshizaki

margins rising

Ricoh & Pentax

Japan should quit

businesses they have no

competitive advantage in

Hoshizaki Electric (6465) has been another example of a company that has seen a steady

improvement in margins over the last 8 years since listing. The company has seen success of its

Z-series low power consumption industrial fridges which hold the highest share domestically.


However making market share move from irrelevant to tiny isn’t advised

Copier and printer maker Ricoh (7752) announced in 2011 it would buy the Pentax camera

business from Japan’s Hoya (7741) to add to the company’s own sub 2% market share. Ricoh

paid ¥10bn for the Pentax camera business with hopes to get a firmer grip on the consumer

camera market dominated by the Big 3 (Canon, Nikon & Sony) which held over 80% of the market

in the higher margin DSLR business. Ricoh’s net income over the last three years has been flat

at around ¥68bn, with consensus expectations for a similar number for the next two years despite

the softer yen. Canon has a similar story with net profitability expected to remain flat between

¥220 and ¥250bn. Nikon is expect to do around half of its FY2012 net profit in FY17.

We could go on with plenty more examples but the message is clear. Japanese companies must

realise that they should quit businesses they lack a competitive edge in. If Toshiba and Fujitsu

embark on a merger of PCs it will make absolutely no sense other than protecting jobs for several

more years which will be at loggerheads with the Tokyo Stock Exchange (TSE) & Financial

Services Agency (FSA) trying to push a mantra of increasing global competitiveness through

shareholder returns outlined in the new corporate governance code. Although we do not rule out

the possibility of convoy investing with the encouragement of the state.

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http://www.hoshizaki.co.jp/p/f-refrigerator/z-series/lineup03.html


Seria in ¥100 stores

M3’s expanding

services

Japanese success stories are everywhere & generally don’t have fiddly M&A

In my former life as a sell-side analyst I was lucky to stumble over many fantastic small-mid cap

growth names. Looking back over the past few years I only wish that strict compliance hadn’t

hampered my ability to buy some of them. Note the following is not in any way endorsing a

recommendation to buy/sell the companies listed hereafter. I own none of these shares (sadly).

It is more to reminisce on the fun of finding these ‘diamonds in the rough’ as I liked to call them.

Note I had sell recommendations on a few of the below names on valuation grounds only.

Japanese ¥100 store player Seria (2782) has been the best performer among listed companies

in the space. It has grown its net income steadily post Lehman Shock, despite the weaker yen

and the consumption tax hike. The shares have responded strongly since that date. Seria is a

good example of a company executing well to a one product strategy.

Source: Consensus estimates, Company Data, Custom Products Research

M3 (2413) has forged a globally dominant Facebook for doctors platform which cuts costs for

pharmaceutical companies marketing representatives. The company has expanded the services

to leverage business lines to the nearly 2.5mn doctors in its database. M3 trades at 61.1x FY16E

Toyo Keizai EPS estimates.


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SMS

MonotaRO

InfoMart has doubled margins

SMS (2175), owned 50% by M3, is a recruitment site for medical professionals disguised as a

social networking site for nurses. SMS trades on 37.3x FY1E Toyo Keizai EPS. A simple

business model catering to Japan’s long term need for health/medical services to cope with a

rapidly aging population.


MonotaRO (3064) has driven an online industrial warehouse with same day delivery services.

The company has also seen strong net income growth which has been reflected in share prices.

MonotaRO trades at 73x FY16E Toyo Keizai EPS estimates.


InfoMart (2492) has developed an innovative B2B e-commerce site for restaurants and hotels

which facilitates ordering between food suppliers. Operating profits have grown from ¥600mn in

FY06 with consensus expectations looking for ¥2.65bn in FY16. Revenues are expected to

double from ¥3.04bn to ¥6.74bn on the same metrics with OP margins growing from 19.7% to

38.9%. Effectively InfoMart is executing on one main service. InfoMart trades at 53.1x FY16E

Toyo Keizai EPS estimates.

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Daikyo Nishikawa growth in

plastics for auto panels

Uber, Airbnb & Apple’s

assetlessness

Source: Toyo Keizai estimates. Company Data, Custom Products Research

It is rare to see automotive parts companies see such rapid growth but core Mazda Motor (7261)

supplier Daikyo Nishikawa (4246) has revised up no less than four times since it listed in 2014.

The company has focussed on increasing the use of plastic parts as a substitute for steel. The

company claims its latest technologies enable high gloss colour to be impregnated into the plastic

panel removing the need for painting. Since FY2010, DaikyoNishikawa has grown EPS by 30.1%

on average versus Denso (6902) at 19% and Aisin Seiki (7259) at 5%.


How the world has changed in what it values

We live in a world today where Uber, the largest taxi company by implied market cap, owns no

vehicles. Airbnb is the largest hotel chain globally by implied market cap but owns no property.

Apple is the largest company by market cap globally yet owns no factories.

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Fig 25 : DaikyoNish ika wa vs Ais in Seik i share pr ice (¥)

DaikyoNishikawa Aisin Seiki


Taiko’s new product line

surging

Nippon Carbon’s

unique technology

Some names that seem to have innovative new technology

We looked at several names which have new technology but share prices that have not reacted

as some of the aforementioned names. Our studies show that liquidity (or lack thereof is a

hindrance to share price performance which we wrote about here.

Taiko Pharmaceutical (4574) has introduced a new product called Cleverin which removes 99%

of viruses and bacteria (airborne and surface). The company claims to have made a leap forward

in producing chloride dioxide in industrial quantities. Sales of the product have doubled since

FY12 to ¥3.2bn and operating income surged 77-fold (44% OPM) over the same period assisting

the mainstay ‘Seirogan’ gastro business, Fig. 20. The Cleverin business also has industrial

applications. Taiko claims to have the number one share in both product fields. Daily turnover

has been ¥282mn over the last 12 months. Taiko trades at 20.3x FY16E Toyo Keizai EPS.

Source: Company Data, Custom Products Research

Nippon Carbon (5302) has teamed up with General Electric (GE) and Safran (SAF FP) to

increase production of its Hi-Nicalon advanced composite fibre 10-fold in coming years to keep

up with supply to CFM International. Hi-Nicalon is a patented ingredient to form the next

generation ceramic matrix composites (CMC) for use in the Leap-X turbine engine. GE is talking

of more of its engine families adopting the new material. Stock trading at 1.2x PBR.


1576

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Fig 26 : Ta iko Pharmaceut ica l (¥mn)

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F ig 2 9 : N ip p o n Ca r b o n s h a r e p r i c e ( ¥ )

http://nebula.wsimg.com/bc8d0d71008ad2c4297789ddb88c9f33?AccessKeyId=5758D7F51D80D7BC0E2A&disposition=0&alloworigin=1

https://www.seirogan.co.jp/en/products/eisei/cleverin_spray.html

https://www.seirogan.co.jp/en/products/eisei/cleverin_spray.html

http://www.seirogan.co.jp/en/products/seirogan/

http://www.ngs-advanced-fibers.com/eng/news/20150602.pdf


Zuiko a leader on

diaper production equipment

JP Holdings leading in day-care

Zuiko (6279) is a manufacturer of diaper production equipment, commanding an 80% market

share in Asia where the growth expected for adult diapers is driven by the aging populations of

China and Japan (population of those over 65 years old set to exceed 25% of the population by

2030). The company says its machines are custom built to client requirements. Unicharm (8113)

owns 3.4% of Zuiko’s outstanding shares. Shares trade on 15.8x FY16E Toyo Keizai EPS.


JP Holdings (2749) is the largest individual provider of day-care centres in Japan. PM Abe has

called for 400,000 new day-care places by 2018 in order to get more women back into the

workforce to offset the declining working age population. The national government is funding c.

88% of the cost of construction in order to accelerate new schools and cut back on waiting lists.

JP Holdings trades on 22.5x FY16E Toyo Keizai EPS.


Beauty Garage (3180) is similar to MonotaRO in business model but focuses exclusively on the

hairdressing, nail, massage and aesthetic salons. Its customers order consumables, furniture

and tools online. The company also offer services (financial, design, furniture, client management

systems) to help new salons set up. The stock trades at 14.8x FY16E Toyo Keizai EPS.

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http://www.zuiko.co.jp/english/02/02_area.html


Beauty Garage

Sony’s innovation

has been a strength if subsidiary

performance is looked at

Intel vs Japan


Sony once prided itself on innovation

The ingredient of ‘innovation’ coursed through Sony’s veins in the 1980s. It dazzled the world

with the ‘Walkman’. Now, Sony is cutting divisions as it seeks to rediscover its own sense of

purpose. Akio Morita would be rolling over in his grave if he saw what had happened. The irony

of it all was that Sony’s innovation didn’t die. It ended up in a lot of creative and profitable spin-

offs such as Sony Financial Holdings (8729) and M3 (2413). However the core business is

struggling to work out what it should be.

What many of the stocks included above show is that focused product lines in relatively untapped

sectors leads to sustained profitability.

Going back to our original study of Intel versus large cap tech companies in Japan we noted that

sales per employee (Fig. 36) numbers are not so far removed from Intel but profitability is a

different question. Figs. 37 & 38 show the large disparity at the operating and net profit levels.


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Intel Sales/Emp Toshiba Sales/Emp Fujitsu Sales/Emp M3 Sales/Emp Seria Sales/Emp MonotaROSales/Emp

InfoMart Sales/Emp

Fig 36 : Revenue/Employee (US$)

FY09 FY10 FY11 FY12 FY13 FY14 Average


Intel has averaged US$139k

OP/employee

Net income a similar story


Intel has consistently achieved US$139,000 at the operating income level. Toshiba and Fujitsu

just manage around $8,000 of operating profit per employee. Seria has doubled its operating

income per employee over the last six years. MonotaRO’s high level of revenue per employee is

more indicative of the low number of employees, at last count 242. M3 has embarked on M&A

which has caused it to absorb a higher number of employees. InfoMart also averages around 7

times the level of Toshiba or Fujitsu.

When looking at Net Income/employee we see a similar trend. Intel manages to pip MonotaRO

and M3. Once again Toshiba only managed to average $1,500 per employee over the last six

years. Fujitsu managed to double Toshiba’s effort.

Intel Toshiba Fujitsu M3 Seria MonotaRO InfoMart

FY09 71,566 3,785 5,883 199,374 6,332 106,361 51,791

FY10 188,945 14,876 9,485 223,971 10,696 156,480 40,351

FY11 174,595 7,122 7,907 184,161 16,189 207,375 40,814

FY12 139,410 5,149 6,509 97,664 14,692 229,427 40,687

FY13 114,229 12,192 8,336 57,468 13,701 196,250 43,494

FY14 143,833 7,160 9,388 50,051 11,614 149,161 61,058

Average 138,763 8,381 7,918 135,448 12,204 174,176 46,366

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Fig 37 : Operating Income/Employee (US$)



Japan must Re-evaluate

Broker staff has halved


In Summary

In conclusion, it is clear that Japanese companies must re-evaluate product line ups and staff

numbers. In today’s globally competitive landscape, Japanese corporations need to innovate.

New age companies that exploit gaps in the market by offering efficiencies without the need for

vast swathes of employees have rewarded shareholders well.

The juxtaposition for the small-mid cap companies is to get recognised by the investment

community. Staff numbers in the Japanese securities industry has halved since 2009, Fig 39.

This is putting even harsher conditions on sell-side securities firms to be able to ‘economically’

cover small-mid cap companies due to the relatively lower liquidity.

Intel Toshiba Fujitsu M3 Seria MonotaRO InfoMart

FY09 54,749 -2,844 5,803 80,469 2,854 57,888 28,929

FY10 138,958 9,632 3,941 129,466 4,880 90,021 23,533

FY11 129,291 198 3,207 108,182 8,998 118,551 22,662

FY12 104,810 751 -4,981 58,832 8,486 132,462 24,775

FY13 89,405 2,856 2,842 35,201 8,326 115,637 25,075

FY14 109,691 -1,589 7,359 30,412 7,418 87,769 36,965

Average 104,484 1,501 3,028 73,760 6,827 100,388 26,990

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Fig 38 : Net Income/Employee (US$)



New regulations

New research

pools

Sponsored research a

reality

Source: Japan Banking Association

The irony is that many in the overseas investment community realise many high value small-mid

cap companies exist in Japan but the regulations (such as MiFID II) will force the separation of

trading and research commission. That will mean investment firms will need to put a hard price

on research reports. Companies such as ResearchPool & Research Exchange aim to provide

an Apple iTunes style platform which will allow investors to pay transparently for individual

reports, Fig. 40. Any research house can list their financial research on these exchanges and

pay a percentage from the price they set as a fee.

Fig 40 : Independent Research Exchanges

Source: ResearchPool Limited

Japanese corporates will be forced into the position to look to sponsored/independent research

houses to improve chances of being discovered by institutional investors. While brokers have

tended to provide this service over the decades, onerous compliance costs, coupled with a lack

of liquidity in small-mid cap stocks will prevent companies gaining exposure. Although the costs

of getting coverage is tiny relative to the peace of mind it can provide not only to increasing

exposure but executing upon the corporate governance code to maximise shareholder returns.

Interesting times ahead and Japanese corporates should waste no time taking action.

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Fig 39: Japanese Securit ies Industry staff numbers

https://www.researchpool.com/

http://rsrchxchange.com/


Important Disclosures:

This material was prepared for you and is for your information and use only. This material should only be distributed to other members of that organization on a need to know basis and should not be distributed or disseminated to any other person or entity.

This material is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. This material is based on current public information that Analogica KK ("AKK") considers reliable, but we make no representation that it is accurate or complete, and it should not be relied on as such. No investment opinion or advice is provided, intended, or solicited. AKK offers no warranty, either expressed or implied, regarding the veracity of data or interpretations of data included in this report. This material is provided with the understanding that AKK is not acting in a fiduciary capacity. Opinions expressed herein reflect the opinion of AKK and are subject to change without notice.

The products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. The value of and the income produced by products may fluctuate, so that an investor may get back less than they invested. Value and income may be adversely affected by exchange rates, interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product is income producing, part of the capital invested may be used to pay that income. © 2015 Analogica KabushikiKaisha. All rights reserved.

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