Valuation of 72 billion yen for a Red-ink Subsidiary. We Reveal Kitao’s Last-Minutes Sale in Fiscal Year End
April 20, 2012
There’s a limit to how much you can ridicule the Japanese stock market, Yoshitaka Kitao (CEO), who holds the theory that in the capital market there is a "pure and fierce undercurrent" supporting the capitalist economy.
I am talking about the press release that SBI Holdings (hereinafter referred to as SBI) issued on March 30, right at the end of the financial year. SBI announced that it has sold a portion of the shares it held in its consolidate subsidiary SBI ALApromo (hereinafter referred to as ALApromo) to multiple third party businesses and that it expected to appropriate this as extraordinary income in its financial report for the fiscal year ending March 2012.
SBI has sold 5.83% of the original 79.15% of ALApromo shares it held but the extraordinary profit incurred from the sale is an astounding 4,200 million yen. If we apply this calculation to the market capitalization of ALApromo, it works out at over 72 billion yen.
When did SBI get hold of such a valuable consolidated subsidiary? ALApromo was founded in April, 2008 as a wholesaler for health foods and cosmetics that contain 5-aminolevulinic acid (ALA), a type of amino acid. Along with this partial sale of shares, the company name has been changed to SBI Pharma but its biggest selling point when it was founded was that it was a joint venture between SBI and Cosmo Oil. Cosmo Oil still holds close to 15% of the shares.
Capital Raise for Drug Discovery? Are You Joking?
However, ALApromo business performance couldn’t be more inadequate. According to documents from an independent corporate research agency, sales were
38 million yen in the fiscal year ending March, 2010
58 million yen in the fiscal year ending March, 2011 and
60 million yen in the fiscal year ending March, 2012 (projected)
and operating profit and current profit are recorded only as losses. Kitao himself acknowledged at the briefing for the fiscal year ending March, 2012 that this company is seriously haemorrhaging funds with an operating loss of 1,100 million yen in the fiscal year ending March, 2011 and 800 million yen for the period of April to December, 2012.
Sales are only around 60 million yen and with the continued bleeding of approximately 1,000 million yen, the market capitalization is 72 billion yen? Have you ever heard anything so ridiculous?
The press release plausibly explains the reason for the sale of the shares. “We plan to use funds gained from this share transfer mainly as initial investment funds to accelerate the pharmaceutical development business using ALA.”
Pharmaceutical development? It is obvious from a glance at the ALApromo website that the company deals with nothing more that health supplements. We only have to compare it to the first pharmaceutical development venture of the University of Tokyo, OncoTherapy Science. It was founded in 2001 by Yusuke Nakamura (currently a professor at the University of Chicago Medical Center) who is a cancer vaccination researcher and it has a decent market capitalization of 30 billion yen with industry expectations that it will obtain approval for the manufacture and sale of a cancer vaccination within 2 or 3 years.
Does SBI seriously believe that investors will believe this explanation?
If it is really embarking on a pharmaceutical development, it is logical that ALApromo itself should issue new shares and do its own fundraising. There is no point in selling the shares held by SBI if the funds will not go to ALApromo but are appropriated as extraordinary income for SBI. It seems clear that the intention is to conceal the sale of these shares through manipulation of figures in the financial report even though they have been expressly labelled as funds for the new business.
In the same way as the recipient of SBI’s consolidated subsidiary Homeostyle share transfer was “a certain individual” which we covered in a previous issue (SBI conceals disengagement of consolidated subsidiary) , the purchasers in this transaction are described only as third parties and it remains unclear who they are.
Furthermore, there is no mention of these third parties not being having connections to SBI but there has probably been cooperation from another member of the SBI “bodyguards” in the same way as the “certain individual” (there is no doubt that this individual is Hiroshi Fujiwara, President and CEO of Internet Research Institute) was involved in the exchange of shares for Homeo.
Kitao Admirer NEXYZ. Cooperated.
There are still some doubtful points. How is it possible to transform a loss-making company with sales of around 60 million yen into a company with a market capitalization of 72 billion yen?
The key to the trick are the records in the securities report of a certain start-up.
This start-up is Nexyz which made a public offering on NASDAQ Japan in 2002 and was listed on the first section of the Tokyo Stock Exchange two years later. Its founder, Takami Kondo, born in Osaka in 1967, started out as a salesman for home telephones with an internal calling function and built Nexyz as a cellphone agency start-up.
Currently Nexyz is a holding company comprised of 6 companies including Nexyz BB, a fiber-optic internet service provider and the group sales for the financial year ending September, 2011 were approximately 7,400 million yen.
Take page 92 of the financial report that Nexyz submitted to the Tokyo Stock Exchange and the Osaka Securities Exchange on December 26 of last year. The following is recorded as investments in securities in the itemized account of marketable securities.
Trading name: SBI ALApromo, No. of shares: 194, Balance sheet appropriation amount (1,000 yen): 199,542
In other words, Nexyz purchased 194 shares of ALApromo for 199,542,000 yen. This took place during the last financial year for Nexyz (October 1, 2010 – September 30, 2011). This price of one share is 1,028,500 yen. ALApromo has repeatedly increased capital in the past but all of these increases have been 50,000 per share. This means that Nexyz purchased these shares at a price over 20 times higher than the original price.
Going back to the Nexyz financial report, short-term borrowings in the itemized account of debts payable (page 79) have increased from 1,000 million yen to 1,200 million yen. This coincides precisely with the 200 million yen required for the ALApromo capital increase.
Why does the capital increase price suddenly jump to 20 times the original price without any change in business performance? Even with an abnormal price, if there is a responsible company that can justify that amount, the capital increase will also be justified. If Nexyz had not taken on these shares, this 4,200 million yen of realized profit would not have been possible.
Kondo is a devotee who is open about calling Kitao his mentor due to the fact that Kitao invested in his ventures during times in which it was difficult to raise funds. Currently, Nexyz is an SBI loyal client with 909 shares totalling 1,520 million yen in 4 of the investment funds managed by SBI.
Having said that, no matter how much of a mentor Kitao is, how did Kondo explain the reason for such a high value undertaking of shares from a loss-making company? After all, Nexyz is a listed company. Was there a meeting of the board of directors? And if so, what was discussed in order for this high value undertaking to go ahead?
Nexyz did not respond to the written inquiry from this magazine FACTA and only stated by telephone that “all pertinent information has been disclosed”. SBI, who waited for us to make the first move by replying with their press release after our previous issue was published, has again refused to respond giving the reason that SBI and FACTA are “in litigation”. Tohmatsu, the auditor, also sent a fax saying that they could not respond under the pretext of Article 27 of the Certified Public Accountants Act (obligation to observe secrecy).
So is the Tokyo Stock Exchange going to shut its eyes once again to this blatant manipulation and extremely arbitrary invention of figures?
On March 29, SBI announced that it is to sell its treasured settlement services business, SBI VeriTrans, to Digital Garage. This is one of the five core businesses of SBI which are securities, banking, life insurance, non-life insurance and settlement services and there are many people who are puzzled by this announcement to relinquish VeriTrans which was making a profit.
Let’s take a closer look at this. If the profits from the sale of VeriTrans are invested in SBI related funds, additional investment into bio-ventures with which it has strong connections is made and ALApromo shares are bought, this could be seen to be a spectacular sale to a third party.
For example, Acucela Inc. and Quark Pharmaceuticals Inc. are both bio-ventures in which SBI Broadband Capital has invested and these companies seem to be perfect for this role. This is easy to do if you are a master of manipulation.
Continued buying support leads to heavy 44% loss
The biggest mystery is SBI’s largest shareholder, Orvis. This is a fund which is registered in Bermuda in the West Indies and its official name is Orvis Investment Management Limited. As of September, 2011, 3 shareholders that seem to be Orvis affiliated companies hold SBI shares with the following ratios: 8.7% (highest), 7.3% (second highest) and 1.3% (eighth highest).
The initial investment was the purchase for 8,500 million yen of 700,000 SBI shares held by the real estate company Zephyr that failed in July, 2008 but, in fact, Orvis has become a very useful shareholder that conducts buying support each time the SBI share prices falls, for example, during the Lehman Shock.
Even in the period from the end of last year until February of this year, in other words, during the period in which the article (Kitao SBI Golden Egg Usurpation Business) in the January issue of this magazine was a reason for selling shares, the Orvis shareholder ratio for SBI increased by around 2%. Have a good look at the graph and the table for a demonstration of these strange movements.
Currently, it is thought that Orvis holds around 4.5 million shares and as the average acquisition amount was 12,678 yen but the closing price on April 12 was 7,060 yen, this means a heavy loss of 44%. Fund managers should have blanched at this. But where is the source of these generous funds? The mystery and misgivings are just intensifying. Although, it is true that Orvis may be an unlucky pillar shareholder who was persuaded by Kitao’s sales pitch....
On April 13, SBI Pharma issued a press release announcing an agreement with the Bahrain government for the promotion of the ALA business. Once again this magazine’s coverage falls into place with the waiting game.