Terrie's Take 819 -- Laox Rides a Chinese Rollercoaster, e-biz news from Japan

Terrie's Take terrie at mailman.japaninc.com
Mon Sep 14 08:57:27 JST 2015

* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term 
technology and media entrepreneur living in Japan. 

General Edition Sunday, September 13, 2015, Issue No. 819

- What's New -- Laox Rides a Chinese Rollercoaster
- News -- Child poverty one of worst in OECD
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Historic house in Kumamoto, Beautiful ryokan in Shimane
- News Credits

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While the world stock markets have been roiling over economic 
uncertainty in China, there is a microcosm of the rollercoaster ride to 
be found in a company based here in Japan -- an fast-growing electronics 
retailer called Laox. By "microcosm" we mean that if you take a look at 
the Laox stock price over the last 6 weeks, since just before the August 
24th "Black Monday" on the Chinese stock markets, you will see that 
their shares have moved almost 40% from the top (JPY524 on Aug 14th) to 
bottom (JPY324 on Sep 8th), then recovered by 20% in just the last 3 
trading days. If we were a day trader, this is one stock that would be 
fun to play with.

The main reason Laox has seen such highs and lows lies with the fact 
that the company's own fortunes are deeply entwined with the economics 
of China. Laox's largest shareholder since 2009 has been China's largest 
electronics retail chain, Suning. Laox's CEO is Luo Yiwen, a savvy 
Chinese national with more than 20 years experience in Japan. And most 
importantly, about 80% of Laox's customers are Chinese tourists, who 
pull up by the bus load to pile suitcases with electronics goodies to 
take back home. In fact, looking at Laox's own numbers, it appears that 
up to an amazing 62% of ALL Chinese tourists coming to Japan may shop at 
a Laox store. This shows what an awesome marketing machine Laox has in 
China and the quality of the ties it has with Chinese tour agencies.

The China connection has been good to Laox. Even though the company does 
less than 1/30th of the revenues of industry leader Yamada Denki, a 
Chinese newspaper noted in June that the retailer had become the largest 
Duty Free store chain in Japan. Furthermore, while leader Yamada Denki 
has seen its profit drop dramatically in the last two years mostly due 
to the increase in consumption tax and falling discretionary spending by 
Japanese, Laox in contrast has seen its profit soar 570% in the last 12 
months, and in so doing has hit its highest profit level since the 
company went public in 1999.

So it's fair to say what happens to China happens to Laox.

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[...Article continues]

This point hasn't been lost on shareholders, and in a July Credit Suisse 
report, the company responded to an investor concern about 
over-dependency on Chinese tour groups, by saying that it is now 
appealing to Chinese FIT travelers as well. We find it refreshing that 
the company doesn't bother to deny its over-dependency on Chinese 
tourists in full, but sees that tour groups are just one segment of a 
rich market. Given the  amazing numbers that they are doing, we suppose 
no one is too bothered by this simple fact. Still, if the Senkaku 
Islands dispute were to re-emerge, we'd be quick to short the stock for 
a while.

Laox has an interesting recent history. After going public in 1999, it 
got caught out by competitors in the early 2000's and was essentially 
bought out for cents on the dollar by a private equity fund called MKS 
Partners. Some readers may remember the erstwhile Nobuo Matsuki who ran 
the fund. Nice guy. Anyway, MKS was unable to pull Laox out of its deep 
funk and essentially called it quits several years later. In 2008 after 
7 straight years of losses, a fund called Milestone Turnaround 
Management took over sponsorship of Laox and just one year later 
Milestone was fortunate enough to sell its stake to Suning of China.

At the time this deal was done, the Laox sale was one of only three 
private equity backed Japanese firms to be sold to an Asian strategic 
acquirer. Perhaps in another period, the image of a Chinese company 
acquiring a venerable (80-year old) major Japanese retailer might have 
caused a political fuss. But Laox was so heavily on the ropes that it 
probably wouldn't have survived much longer. So, better a Chinese buyer 
than going under (someone needs to tell this to Sharp). It also speaks 
volumes about the skill of the current management team under CEO Yiwen, 
that last fiscal year was the first year of profit for many years. It's 
been a good investment for Suning. They paid around JPY800m for the 
first 27.36% in 2008 of the 65% they now own, and with a market cap of 
JPY343bn in July, that JPY800m investment is now worth JPY93.8bn -- not 
too shabby!

Where will the Laox stock go from here? Well there is no doubt that 
although the company is dependent on China, and although its China 
electronics stores network is not going well, it is not planning to pull 
its horns in either. Rather, Laox just last June announced a joint 
venture with apparel company Onward Holdings, to start producing 
Japanese-designed apparel, presumably for sale in the China market and 
to Chinese tourists. This makes sense, because with the ability to 
design its own lines of clothing, it gets to build in stronger margins 
and produce goods that it knows will sell.

Cross-selling electronics for apparel also makes sense when you consider 
that the top buyers among Chinese tourists are women, and after 
cosmetics their preference is for apparel (not electronics, which comes 
in 3rd or 4th depending on the survey). There is also a shoemaker that 
Laox bought recently, in the mix -- reinforcing the signals for where 
Yiwen is taking the business.

...The information janitors/


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+++ NEWS

- Growing stem cells in industrial volume
- Post Office IPO biggest since 1998
- Watami has feathers clipped
- Child poverty one of worst in OECD
- Wages fall 2.5% yoy in June

=> Growing stem cells in industrial volume

Interesting announcement from University of Tokyo (Todai) researchers 
that they have figured out how to significantly speed up the production 
of liver cells morphed from stem cells. The new cells harvesting method, 
which uses protein-coated magnetic beads, reduces the time for iPS cells 
to become progenitor liver cells from about a month to just two days. 
The researchers have confirmed that the new process yields industrial 
grade cells that are stable and freezable. ***Ed: If there is one thing 
we can be sure of from Japanese researchers, it's steady improvement of 
processes -- not long before we see bio factories supplying the world 
with new stem cell therapies. No wonder the government is throwing so 
much money at this sector.** (Source: TT commentary from nikkei.com, Sep 
11, 2015)


=> Post Office IPO biggest since 1998

The government is hoping to reap a windfall of at least JPY1.4trn from 
shares sold in the upcoming IPO by Japan Post Holdings in November. 
Subscription by Japan's ordinary citizens is expected to be massive, 
because you don't get many more Japanese "bedrock" as a company than 
Japan Post. A huge presence in financial and postal services coupled 
with government-endorsed commercial advantages make the investment very 
low-risk. 80% of the shares will be sold to domestic investors and 20% 
to foreigners. ***Ed: Apparently the listing is part of some master plan 
by PM Abe to encourage more families to become shareholders. Not sure 
why that is desirable when you have the government manipulating prices 
behind the scenes.** (Source: TT commentary from bloomberg.com, Sep 10, 


=> Watami has feathers clipped

It looks like the general downturn in consumer spending is starting to 
take its toll on some of the bigger restaurant players in Japan. 
Apparently due to large losses in its core food service operations, 
Watami Company is putting its profitable elderly care business up on the 
block. As of the end of FY2014 (March this year), Watami had 111 nursing 
homes across Japan, bringing in sales of JPY35.4bn. ***Ed: We expect to 
see other domestic consumer services companies have similar tribulations 
in coming months, if the government doesn't figure out how to stimulate 
consumer spending again.** (Source: TT commentary from 
the-japan-news.com, Sep 11, 2015)


=> Child poverty one of worst in OECD

Whatever happened to equality in Japanese society? It appears the gap 
(Gini ratio) is widening and now over 16% of Japanese kids lives in 
poverty. This is the worst since Gini data was tracked in 1985, and with 
55% of single-parent kids living in poverty, this is one of the worst 
ratios in the OECD. Japan considers families with income of less than 
JPY1.22m per person as being in poverty. Unfortunately there are many of 
them, and once in poverty, the condition tends to stick, as evidenced by 
only 20% of those kids going on to university and thus finding the means 
to change their economic status. ***Ed: PM Abe should be ashamed of 
these numbers. How is it possible that the country is expending huge 
amounts of money on concrete and infrastructure when such a large 
proportion of its future population is being so disadvantaged?** 
(Source: TT commentary from Bloomberg.com, Sep 10, 2015)


=> Wages fall 2.5% yoy in June

Nervousness about world markets means that Japanese companies are still 
not passing on earnings to employees (in the form of wage increases). 
Rather, as of June, the total cash income for the average worker was 
actually down by 2.5% over the same period in 2014 -- and this does not 
mean  "real wages" (i.e., after inflation). No wonder, then, that 
consuming spending has been in a slump and why analysts are predicting 
the Bank of Japan will have to do another round of Quantitative Easing 
(QE). ***Ed: Hopefully this next time around, not just the QE but the 
governments own fiscal stimulus programs will try to channel cash to 
actual families, not their employers or shareholders. Clearly trickle 
down is not working. Fear and selfishness are innate traits in a 
restricted society.** (Source: TT commentary from wsj.com, Sep 4, 2015)


NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links -- we apologize for the inconvenience.


-------------- Have a Tour to Promote? --------------------

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----------------- ICA Event - October 15th ----------------
Speaker: Jonathan Hope - Partner, Fusion Systems Japan
Title: " Secure Corporate Data and Messaging on the Cloud: What are the 
Commercial Risks?"

Details: Complete event details at http://www.icajapan.jp/

Date: Wednesday, October 15th, 2015
Time: 6:30 Doors open, Buffet Dinner included with charges and pay as 
you go cash bar.
Cost: 4,000 yen (members), 6,000 yen (non-members) Open to all. No sign 
ups at the door!!!!!!!
RSVP: By 1pm on Monday October 12th, 2015. Venue is The Foreign 
Correspondents' Club of Japan



No feedback this week.



=> Mifune Machinaka Gallery, Kumamoto
Create your own Japanese space in a historic house

When I was walking along Honmachi-dori which runs alongside Mifune 
River, a pure white walled Japanese building caught my eyes. I wondered 
what was inside and found a sign saying "Mifune Machinaka Gallery". A 
caretaker invited me to "please come in" and opened the gate. What I 
found is worth a repeat visit.

The gallery is an ancient house renovated in 2014, having originally 
been built in the Edo Period (1603-1868) for the Hayashida family. They 
made their fortune in various businesses, including rice polishing, sake 
brewing, land and sea transport, trading, accommodation and finance. The 
property consists of the main house, two storehouses and a detached 
building which evokes images of the powerful Hayashida clan in feudal 

In the main house, the entrance hall stretches quite some distance and 
the huge main tatami mat living room can be divided by fusuma (wood 
frame-and-paper sliding doors). I felt like I was exploring a special 
hideaway from another age. The storehouses are lit up in an elegant way, 
creating a historic but chic atmosphere and it's interesting to see the 
structure of ceiling and the open wood beams from the inside.


=> Fukuma-kan, Shimane
An unparalleled ryokan experience by the Sea of Japan

Japan is known for its busy mega-metropolises existing in stark contrast 
to the idyllic beauty of its countryside towns. Where the former are 
easily accessible, it is difficult for visitors to decide upon a remote 
location that will live up to their massive expectations. While 
different regions of Japan offer their own unique vistas, for me the 
highlight of my trip was Fukuma-kan in Mihonoseki Harbour, Matsue City, 

Located in the Mihonoseki Harbour on the eastern tip of Shimane 
Peninsula, Fukuma-kan is a ryokan offering magnificent views of the Sea 
of Japan, while retaining a rustic, rural charm. Although a trip to the 
nearby cities of Matsue and Yonago, and attractions such as Matsue 
Castle and Izumo Taisha, will probably be on the cards, the beautiful 
harbour-side town of Mihonoseki and the hospitality afforded by 
Fukuma-kan will be more than enough to impress and occupy your mind long 
after you leave.




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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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