Tokyo Intelligence Report

Financial Times.com picked a miserable situation of Japan’s Initial Public Offering of as of September 7, 2008. I agree that the Financial Times concluded that “the chances of improved activity look bleak as companies are put off making initial public offerings by volatile equity markets,” in this article.

Financial Times.com
Bleak outlook for Tokyo IPO climate

I have been involved in several projects for supporting IPO of clients’ companies as an independent consultant since 2005. Therefore, I know that a lot of unlisted companies decided to postpone IPO or otherwise abandon its original plan and stay private due to unfavorable condition to raise money from stock markets. There, however, are other two crucial reasons to stop looking to go public among Japanese ventures.

First off, let’s review the numbers of IPOs over the period from FY1999 to FY2007. I regard this period as once-in-a-life opportunity for technology-oriented ventures aiming to raise capital. This is because the Internet has became popular since the appearance of Windows95 in 1995 and mobile phone has widely been used when Japanese largest career NTT DoCoMo introduced i-mode in 1999 which provides e-mail and internet access. Those innovations brought many of ventures into stock markets with a more flexible regulatory system such as Mothers, Hercules or Centrex which simplifies examining procedures for IPO than main stock markets.

Fiscal Year	FY 1999	FY 2000	FY 2001	FY 2002	FY 2003	FY 2004	FY 2005	FY 2006	FY 2007
TSE 1st section and 2nd section	8	25	16	20	18	22	18	29	13
Stock Exchanges for ventures	75	157	149	100	101	150	139	155	106
Others	27	22	4	4	2	3	1	4	2
Total	110	204	169	124	121	175	158	188	121

 
(Source: Small and Medium Enterprise Agency of Japan )

Stock Exchanges for ventures: Mothers in Tokyo Stock Exchange, Inc., Hercules in Osaka Stock Exchange, Inc., Jasdaq Securities Exchange, Inc.(JASDAQ), Centrex in Nagoya Stock Exchange, Inc., Ambitious in Sapporo Securities Exchange, Inc. and Q-board in Fukuoka Stock Exchange, Inc.

Others: 1st section and 2nd section of Osaka Stock Exchange, Inc., 1st section and 2nd section of Nagoya Stock Exchange, Inc., Sapporo Securities Exchange, Inc. and Fukuoka Stock Exchange, Inc.

There was a dent in terms of the number of IPO in 2007 influenced by one fact that examining procedures conducted by underwriters and stock exchanges got strict and took longer time than before. That movement of questioning the credibility of smaller ventures resulted from an incident that government prosecutors raided the offices of an Internet venture Livedoor in January 2006 and its founder was jailed for fraud. The new examining procedures covers everything from tax evasion activities of ventures, violation of labor law against work overtime to business ties to the yakuza, Japanese Mafia With those procedures, some are postponed to going public until improvement occurs while some ventures are regarded as inappropriate organizations to be listed.

So how about IPO trend of 2008? According to a portal focusing on IPO activities Tokyo IPO, there have been 29 IPOs during the first eight months of 2008, less than one third number of listings in the same period in 2007.

 
Tokyo IPO
August IPO Market Summary and Outlook for September

The sharp drop of 2008 is being attributed to the tighter regulatory atmosphere following Japanese-version Sarbanes-Oxley Act (J-SOX) has raised the cost for even ventures that are preparing IPO for the immediate future.

J-SOX is an unofficial term which refers to requirements for all of listed companies in stock exchanges similar to Sarbanes-Oxley Act Section 302 and Section 404 in the US. The J-SOX requirements are incorporated in the Financial Instruments and Exchange Law Act which was newly promulgated on June 14th, 2006 and became effective in April 1st, 2008. The J-SOX requirements could increase the burden of huge cost to prepare documents on the ventures.

I could not see any revival of Japan’s IPO the next couple of years, aside from the effects of both strict examining procedures and J-SOX burden though. I think that there are not many ventures qualifying as a candidate for the listed companies to meet what investors wants in terms of the potentiality of growth or technology innovation in Japan.

The Recording Industry of Japan (RIAJ) announced as of August 21, 2008 that consumers downloaded 20.3 million singles, albums and music videos by Internet during the first half of 2008, up 143 percent in unit volume compared with the first half of 2007 and producing 4.3 billion yen in revenue.

 
The Recording Industry of Japan

In addition, downloads of ringtones, ringbacks and full-track mobile downloads by mobile phones grew to 219.5 million units during the first half of 2008, up 104 percent in unit volume year-over-year and reaching 39.7 billion yen in revenue. The growth of digital music sales, however, has resulted in a decline in CD’s sales.

Here are breakdowns of each of contents sales by mobile phone.

Number of Downloads	Unit: 1000 million	% growth compared with the first half of 2008
Ringtunes	96,604	143%
Ringback tones	46,514	83%
Single track	70,701	145%
Music videos	4,631	99%
Other mobile	1,070	64%
Total	219,519	104%

Japan is a unique digital music market where the popularity of both 3G phones and monthly fixed-rate for mobile internet access contributes to market development of music downloads by mobile phones rather than by Internet.  

Revenue	Unit: million yen	% growth compared with the first half of 2008
Ringtunes	10,894	86%
Ringback tones	3,870	138%
Single track	23,349	155%
Music videos	1,361	140%
Other mobile	303	94%
Total	39,777	125%

Japan is a unique digital music market where the popularity of both 3G phones and monthly fixed-rate for mobile internet access contributes to market development of music downloads by mobile phones rather than by Internet.

I read an article “Survey rates Nokia as best mobile brand in Asia-Pacific” in online newspaper NDTV Profit provided by New Delhi Television Limited (NDTV) and reminded of a marketing push of a Japanese leading cellphone manufacture Sharp Corp.

NDTV Profit
Survey rates Nokia as best mobile brand in Asia-Pacific

This article mentions that Nokia ranks the best mobile brand, based upon the results of the “Asia Pacific’s Top 1000 Brands’ survey for 2008” conducted by a research firm TNS which interviewed 3,600 people in 10 countries including Japan, Korea, Australia, China, Hong Kong, India, Malaysia, Singapore, Taiwan and Thailand.

It really makes sense to me because I am able to find Nokia’s cellphones both in showcases and in hands of people whenever I traveled in Asian countries. On the other hand, brand recognition of Sharp’s cellphone is the same as nothing outside Japan.

Sharp began sales of cellular phones in China market at the end of June where other Japanese cellphone brands NEC Corp. and Matsushita Electric Industrial Co. have already withdrawn. Is there any room for Sharp in Chinese market where Nokia controls more than 50% of market shares?

According to Nihon Keizai Shinbun, Sharp markets “Aquos” brand cellphone through a largest Chinese mobile phone retailer Dixintong. Sharp has made success in selling “Aquos” brand of LCDs in China so that it intends to leverage high brand recognition of LCD to sell its cellphone. SH9010C was the first cellphone regarded as a high-end cellphone which is priced around 4,550 yuan, or 68,000 yen.

The price of 4,550 yuan obviously goes beyond the price range costing 3,000 yuan to 4,000 yuan for the existing high-end cellphone segment. It is expensive one from the view of even Japanese because Japanese acknowledges even iPhone 8G is being sold at 299 USD in the US. How does Sharp satisfy Chinese consumers with that price and without unique features of iPhone?

I am only positive that it won’t break down so soon. Do Chinese people love such kind of feature?

According to Nikkei English News, Japan Brand Strategy Inc. announced that Canon Inc. placed ninth in a ranking of Japanese, Chinese and U.S. and European companies that impress Chinese consumers the most, based on an online survey conducted from July 3rd to 15th by Japan Brand Strategy Inc. The online survey queried 1,200 people who live in Beijing, Shanghai and Guangzhou and are in ages between 20 and 59 about 120 firms consisting of 79 Japanese firms, 11 Chinese companies and 30 firms based in other countries. The respondents were either students or workers with monthly incomes of more than 2,500 yuan.

U.S. and European companies do well, compareed with Japanese firms. Top 10 are as follows,

1. IBM Corp. (96.7%)
2. Microsoft Corp. (96.0%)
2. Nokia Corp. (96.0%)
4. Hewlett-Packard Company (94.7%)
5. Bayerische Motoren Werke AG (BMW) (94.3%)
6. Tsingtao Brewery Co. (94.0%)
6. Adidas Ltd. AG (94.0%)
6. Nike, Inc. (94.0%)
9. Coca-Cola Co. (93.3%)
9. Haier Group Co. (93.3%)
9. Canon Inc. (93.3%)

Canon Inc. was ranked at the highest position among Japanese firms. It earned a total of 93.3% of favorable-response rate. Other Japanese firms made the top 30 are as follows,

Sony Corp. placed 23td with an 87.7% of favorable-response rate
Nikon Corp. placed 28th with 85.3% of favorable-response rate
Toyota Motor Corp. placed 30th with 84.7% of favorable-response rate

I wonder why two manufacture Canon Inc. and Nikon Corp. which market digital camera come the top group among Japanese firms. Is digital camera big gudget among Chinese people now?

 
Japan Brand Strategy Inc

A term BRICs has made inroads in Japan financial industry. I could see brochures of mutual funds related to BRICs everywhere in bank branches, brokerages, investment magazine and web sites.

BRICs is the acronym consisting of the initial letters of four countries’ names such as Brazil, Russia, India and China. This term was introduced by Dominic Wilson and Roopa Purushothaman of The Goldman Sachs Group, Inc. in “Dreaming with BRICs: The Path to 2050.” on October 1st, 2003.

How many mutual funds related to BRICs are actually being sold now? I quote numbers of mutual funds sold in Japan as of August 13, 2007, from a web site “fundpro.jp” operated by Uhou data mining Co., Ltd. as follows,

Category of mutual funds (Number of mutual funds sold) [Net assets]

・North American companies stocks (34) [JPY 120.5 billion]
・EU companies stocks (43) [JPY 476.5 billion]
・Chinese companies stocks (59) [JPY 1,144.0 billion]
・India companies stocks (13) [JPY1,016.8 billion]
・BRICS and emerging countries’ companies stocks (39) [JPY1,276.4 billion]
・Japanese investors are in the midst of “boom of investing in emerging markets.” Some investors are interested in post-BRICs’ countries to get a head start on investments.

A new acronym VISTA is in the position of representing such Japanese craze. VISTA consists of the initial letters of Vietnam, Indonesia, South Africa, Turkey and Argentina and was coined by Takashi Kadokura. The popularity of a another set of developing countries’ term “The Next Eleven” named by Jim O’Neill, Dominic Wilson, Roopa Purushothaman and Anna Stupnytska of Goldman Sachs Group, Inc. in “How Solid are the BRICs?” on December 12, 2005 seems to lag far behind VISTA. Countries belonging to the Next Eleven are as follows,

・Bangladesh
・Egypt
・Indonesia
・Iran
・Mexico
・Nigeria
・Pakistan
・Philippines
・South Korea
・Turkey
・Vietnam

I believe that Japanese, especially Japanese media people, love using such acronym in print media and TV when they don’t understand what factor is contributing much to the economic development of those emerging countries and even intend to avoid delving into the essence of things. SO DO I because I am one of Japanese!

It seems to be the first time that Nihon Keizai Shinbun (hereunder referred to as Nikkei) picked up a term “MICE industry” in an article regarding of how Singapore government has conducted several projects to foster its industry on August 4, 2007. MICE, the acronym for Meetings, Incentives, Conventions and Exhibitions, is the relatively new word for majority of Japanese people. MICE industry, however, is one of the fastest growing segments within the tourism industry. According to Nikkei, Hong Kong and Philippines has started to cultivate MICE industry as well.

As I searched for which city in Asia region holds good recognition as a convention city, I found that International Congress & Convention Association (hereunder referred to as ICCA) has announced “ICCA country and city ranking measured by number of meetings organized in 2006,” based on 5,838 events which organized by international associations which take place on a regular basis and which rotate between a minimum of three countries in 2006. According to the ICCA city ranking, top 10 cities and the number of meetings held in 2006 is as follows,

Cities (Number of Meetings)
1. Vienna (147)
2. Paris (130)
3. Singapore (127)
4. Barcelona (103)
5. Berlin (91)
6. Budapest (86)
7. Seoul (85)
8. Prague (82)
9. Copenhagen (69)
10. Lisbon (69)

Another major group the Union of International Associations (hereunder referred to as UIA) reported top ten international meeting cities in its annual statistical studies “International Meeting Statistics for the Year 2005” in August 2006. UIA city ranking covering meetings globally with 8,953 meetings held in 218 countries & territories and 1,468 cities under its criteria is as follows,

Cities (Number of Meetings)
1. Paris (294)
2. Vienna (245)
3. Brussels (189)
4. Singapore (177)
5. Barcelona (162)
6. Geneva (161)
7. New York (129)
8. London (128)
9. Seoul (103)
10. Copenhagen (98)

Unfortunately there is no name of Tokyo in the above rankings at all. I can’t figure out any sound reason why the Japan capital’s popularity is lower than Asian counterparts although the Minister for Land, Infrastructure and Transport has started to promot foreign tourist traffic to Japan under the “Inbound Tourism Initiative of Japan” campaign since 2002.

Nihon Keizai Shinbun (hereunder referred to as Nikkei) covered the article ”Recruiting of foreign IT professionals is growing in Japan” in the top page of evening edition as of August 9, 2007.

Nikkei said as follows,

“JobStreet Corp., the largest online employment agency in Southeast Asia, poised to enter the market by recruiting overseas engineers on behalf of local companies. JobStreet intends to establish a Japanese unit in October jointly with a local firm that specializes in placing IT engineers, with plans to start doing business in November. The Malaysian firm will be the first job agency from Southeast Asia to expand into Japan.

{snip}

JobStreet, which is listed on the Bursa Malaysia stock exchange, and its group firms currently do business in seven Asian countries, including India and the Philippines. A total of 4.2 million engineers in India, Taiwan and elsewhere have registered with the firm through its JobStreet.com Web site.

Statistics compiled by the Labor Ministry show that the ratio of job offers to job seekers for data processing technicians stood at 3.41 in June. Workers experienced in developing video cameras and other digital appliances as well as those who can design robots and electronic circuits are in particularly short supply.

However, foreign technicians must meet stringent conditions to work in Japan, including having at least 10 years of experience. In March, the Japan Business Federation, also known as Nippon Keidanren, requested that the government loosen the requirements.”

Nikkei did not disclose a name of the local firm which will jointly establish a Japanese unit with JobStreet Corp. The partner, however, is a job placement and temporary staffing agency Asian Commission in Tokyo, Japan specialized in placing and dispatching IT engineers.

Asian Commission announced that Jobsteet Corp. and Asian Commission has signed agreement to commence this joint venture on July 18, 2007. According to Asian Commission, Jobsstreet Corp. will subscribe for 60% shares of Asian Commission and Asian Commission will change its name into Jobstreet Japan. Jobstreet Japan site will be launched by October this year.

Nikkei also mentioned other moves of the Japanese temporary staffing agency such as Human Resocia Co. and Tempstaff Co. trying to recruit foreign engineers. I get interested in how many staffing agency in Japan get involved in recruiting foreign IT engineers now?

Nihon Keizai Shinbun (hereunder referred to as Nikkei) reported that the Japan’s largest shipping company Nippon Yusen Kabushiki Kaisha (hereunder referred to as NYK Line) and the Transnational Diversified Group (hereunder referred to as TDG), a business group of over 30 companies engaged in total logistics, ship management, air & travel services, information & communications technology and investments in Philippines, opened the NYK-TDG Maritime Academy in Canlubang, Philippines on June 3, 2007.

The NYK-TDG Maritime Academy costs more than JPY 2 billion to build class rooms, dormitories and training facilities in nine-hectare land space. In the first year of the college a total of 120 students consisting of 60 students for courses in navigation and 60 students for courses in engineering enrolled and 12 instructors engaged in. Graduates from the NYK-TDG Maritime Academy will be given priority for joining NYK Line as seafarers after three years of classroom work followed by one year of onboard training.

According to Nikkei, NYK Line plans to add from the number of 742 vessels in FY2007 to 950 vessels in FY2010 as shipping demands due mainly to China economic growth increase rapidly. Hiring skilled seafarers of India or nations in East Europe, therefore, has been toughened by competition among other shipping companies. To actualize business expansion, NYK Line decided to train highly skilled seafarers by itself in Philippines which has lower standard of living comparing to other nations in Asia region.

A financial services group SBI Holdings, Inc. (hereunder referred to as SBIH) announced as of March 27, 2007 that it has completed to increase capital of a subsidiary SBI Ven Capital Pte. Ltd. which would be an investment base in Asia region. SBIH planned to launch venture capital funds targeting start-up and unlisted companies in India, Vietnam, Thailand and other countries.

SBI Ven Capital Pte. Ltd.

Establishment: February 22, 2007
CEO: Yoshitaka Kitao
Location（planned）: 2 Shenton Way, #04-03 SGX Centre1, Singapore 068804
Number of employees（planned）: 6
Paid in capital increased: USD 400,000
Shareholder: SBI Holdings, Inc. 100％

Regarding of venture capital activities of SBIH, SBIH has agreed to crate RBB based fund, in an amount equivalent to USD 30 million, with Tsinghua Holdings Co., Ltd. in China. Tsinghua Holdings Co., Ltd. is an asset management company wholly owned by Tsinghua University. The RBB based fund targets to investing in start-ups operated by Tsinghua University students, faculty members, alumni and other universities affiliates in December 2006. Furthermore, SBI Investment Co., Ltd. (formally called SOFTBANK Investment), the venture capita arm of SBIH, has launched USD 100 million venture capital fund with the investment banking subsidiary of State Bank of India, targeting the knowledge industrial sectors, such as Business Process Outsourcing, Knowledge Process Outsourcing, life science, online businesses, technology-enabled design and manufacturing of India in August, 2006.

A Chinese online game operator Nineyou International Limited (hereunder referred to as Nineyou) has suspended its stock exchange listing of Nippon New Market “Hercules” of Osaka Securities Exchange Co.,Ltd., delaying to create what would have been the first foreign online game company listing stock in Japan’s Stock Exchange.

The following passages is quoted in part from Nineyou’s news release as of July 7, 2007,

“The Board of Directors of Nineyou International Limited (“Nineyou”) resolved today to suspend and postpone for the time being, the public offering of Nineyou shares by way of issuance of 46,000 new shares, secondary offering of 51,000 shares and over-allotment secondary offering of 9,700 shares, which was approved by the Board on June 15, 2007. Thus, the listing of Nineyou’s shares on the Osaka Securities Exchange will also be postponed.”

“The reason for the postponement is as follows: T3 Entertainment Co., Ltd. (“T3 Entertainment”), the developer of the online game “Audition”, announced on July 3, 2007 that it will seek legal remedies against Nineyou for the payment of past royalties for “Audition” and that it will not renew the license agreement. However, (i) T3 Entertainment is not the licensor of “Audition” under the license agreement which Nineyou is a party to, (ii) Nineyou entered into the license agreement regarding “Audition” with Yedang Online Corp. (“Yedang”), under which Nineyou has appropriately paid all agreed royalties to Yedang, (iii) Yedang has the exclusive right to license “Audition” outside Korea until September 5, 2010 and (iv) Yedang has confirmed to continue its good business relationship with Nineyou.”

T3 Entertainment apparently does not leave any comment regarding to Nineyou’s news release in its Korean language’s website.

From reviewing several blogs run by individual investors who could have had chance to purchase the shares of Nineyou, there were not much call for applications for Nineyou’s shares sold through the initial public offering because of the following reasons,

Nineyou is a Chinese company abided by Chinese tax regulations which is different from Japan’s one
Underwriter is Morgan Stanley Japan Securities Co., Ltd., a subsidiary of Morgan Stanley, which does not have much experience of the initial public offering in Japan.
85.5% shares are held by venture capitals which lead to enormous share selling pressure.
Nineyou seems to have difficulty in raising JPN 20 billion from the financial market Nippon New Market “Hercules” of Osaka Securities Exchange Co.,Ltd. because of relatively small traded volume of “Hercules.”
Head quarters is located in the Cayman Islands which Japanese individual investors are never familiar with at all.
There is a fundamental question for Japanese individual investors as to Nineyou’s stock exchange listing in Japan’s Stock Exchange; why Nineyou does not choose the stock exchange listing in China’s Stock Exchange?