Report type: Weekly Strategy

”Shifting Towards Telecommuting and Wholly-Owned Subsidiaries”

The momentum of Covid-19 re-infections does not seem to be slowing down.  While PM Abe did not ask people to refrain from returning to their home towns for Obon, Tokyo Governor Koike said on 6/8 that “this summer is a special summer”, and appealed for people “to refrain from excursions, returning to their home towns, eating out at night, and travelling to faraway places”.  As mentioned in the 3/8 weekly report (page 2), the spread of telecommuting as a response to Covid-19 has helped to increase orders for detached houses in the suburbs.  Major factors include the ease of using a study room as a workplace, possibility of working on a separate floor from the living room so that family members are not disturbed, and lower living costs compared to living in an apartment in the city center close to the work place. 

However, it is important to improve work productivity even while telecommuting.  We therefore need WiFi routers with the latest specifications for high-performance PCs and peripheral equipment, optical fibers that can handle the increase in data traffic, and AV equipment such as high-performance microphones and webcams for efficient video conferencing.  Telecommuters during the recent emergency declaration period who had noticed the importance of such equipment will probably have begun searching for affordable products at home electronics stores and e-commercie sites in preparation for the next phase of telecommuting.  

Adequate ventilation at home is necessary to prevent infection.  In particular, we need to pay attention to insect bites during summer.  We also need to consider ways to enrich and enjoy our  bathing times in order to reduce stress, stay healthy and have a comfortable telecommuting lifestyle.  Furthermore, time spent for video transmission and game apps through smartphones will have increased under telecommuting environments. 

Due to the uncertain impact of Covid-19 on business results, there is an increasing demand from parent companies to keep profits and cash within corporate groups.  In this regard, we can expect to see accelerated efforts to convert listed

subsidiaries of publicly-listed parent-subsidiary pairs into wholly-owned subsidiaries.  On 30/7, Fujitsu (6702) announced that it was targeting to convert Fujitsu Frontech (6945) into a wholly-owned subsidiary through TOB.  Considering the risk of delisting via TOB, it will be necessary to purchase at a cheap price when investing in a listed subsidiary in a publicly-listed parent-subsidiary pair.  On top of that, Sumitomo Bakelite (4203) announced on 31/7 that it would execute a TOB for Kawasumi Laboratories (7703), an affiliated company accounted for by the equity-method handling medical devices such as artificial dialysis products.  It is noteworthy that we are beginning to see cases of companies leveraging on their being large shareholders to convert targets into wholly-owned subsidiaries via TOB even though these are not their subsidiaries. 

The Nikkei Average seems to have avoided hitting another bottom since hitting its lowest point on 19/3 due to the impact of Covid-19 since the beginning of the year.  The ability to continue high-level fiscal stimulus providing various financial benefits in response to the economic emergency may be a necessary condition to avoid hitting another bottom.

 In the 11/8 issue, we will be covering Toei Animation (4816), Earth Corp (4985), Elecom (6750), and Yamada Denki (9831).

• Toei Animation Co., Ltd (4816)　　　 　　　　　　    5,920  yen (7/8 closing price)

・Established in 1948. Involved with video production and sales business involving planning, production, broadcast rights sales of various animation productions, licensing business that licenses animation characters and receives royalty, and product sales business of animation characters. 

・For 1Q (Apr-Jun) results of FY2021/3 announced on 30/7, net sales decreased by 9.0% to 12.676 billion yen compared to the same period the previous year, and operating income decreased by 11.0% to 3.986 billion yen.  Revenue decreased due to postponement of release of theatrical works, suspension of broadcasting of new TV animation series, and postponement and cancellation of events and functions due to the spread of Covid-19.  Profit also decreased despite decrease in cost of sales.

・For its full year plan, net sales is expected to decrease by 8.8% to 50.0 billion yen compared to the previous year, and operating income to decrease by 37.9% to 10.0 billion yen.   “Slam Dunk”, a smartphone game created through collaboration with DeNA (2432), started distribution in China in December 2019 and has been a success so far.  The game has attained No. 1 ranking in Hong Kong, Taiwan and Macau, and distribution will begin in South Korea from end July.  Seems that company’s IP (Intellectual Property) has contributed to the significant increase in the profits of DeNA for the Apr-Jun period (YoY comparison). 

• Earth Corp (4985)　　　 　　 　　　          　　　7,320 yen (7/8 closing price)

・Established in 1925.  A group company of Otsuka Holdings (4578), developing household products business and comprehensive environmental hygiene business.  Household products business includes Earth Red, Mondahmin, Polident, Bathclin etc. 

・For 1H (Jan-Jun) results of FY2020/12 announced on 6/8, net sales increased by 6.3% to 110.634 billion yen compared to the same period the previous year, and operating income increased 2.2 times to 16.024 billion yen.  Favorable weather conditions had helped push sales in the pest control department and increase in stay-at-home consumption had also contributed to higher sales.  Changes in sales mix, cost reductions, and SG&A expense reductions had contributed to profit growth.

・For its full year plan, net sales is expected to decrease by 1.3% to 187.0 billion yen compared to the previous year, and operating income to increase by 17.5% to 4.6 billion yen.  As ventilation is recommended as a countermeasure against virus infection, growth of pest control products preventing pest intrusions is expected.  Bath salts such as “Kikiyu” and “Japan’s famous hot springs” will grow as time spent at home increases.  In addition, increased awareness of hygiene management at food and packaging-related factories will be a push factor for the comprehensive environmental hygiene business.