SBI Depends on Reprocell for Cash

iPS Related Business Caused a Hype. Kitao Expects Much on this, but it May Turn Sour.

June 20, 2013

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As Abenomics euphoria fades, the stock market suffered a sell-off, and went into a correction. Reprocel, a star among bio venture companies, will make a debut on JASDAQ in June 26th, amid gyrating market. The IPO candidate has been much-hyped before the listing, as its main business area focuses on “iPS cell” of which Dr. Shinya Yamanaka of Kyoto University Medical School awarded a Novel Prize in Physiology or Medicine last year. A person in brokerage business awaiting the IPO saying; “We expect very good first price of trading, as it is the most promising bio-venture this year”.

Most of the day traders must not read detailed lines of prospectus. Gnomes of Tokyo only see glees of universities and iPS on the company which was established 10 years ago by utilizing technologies developed by Dr. Norio Nakatsuji (Chief of Kyoto University Regeneration Medical Center) and Dr. Norimitsu Nakauchi(Tokyo University Medical Science Center Stem- Cell Research Center).

This year bio-related stocks have become daring of the market. For example, the stock price of a company focusing on regeneration of human skin and cartilage, Japan Tissue Engineering shot up from last year’s 70,000 yen to more than 100,000 yen in the beginning of the year. It surged as much as 799,000 yen in May 7th, but dropped like jet coaster to 400,000 yen in June.

SBI Owns More than 14%

That is nothing but a bubble. Peptidream, which made an IPO in June 11th at TSE Mothers did not close on the first trading day, and the first price registered on the second day was at 7,900 yen, more than three times of the IPO price.

IPO price of Reprocell is now tentatively assumed at 2,570 yen on the prospectus, but it will be priced higher after a book-building, and the market capitalization, when traded, could be 100 billion or even reaches 300 billion yen. The offering will be 1.3 million shares, excluding green shoe option. Yoshitaka Kitao of SBI must be irritatingly waiting the higher price to be realized. As summarized in the attached table, the largest shareholder of Reprocell is SBI Incubation. On top of that, if holdings of SBI Trans Science and that of three investment partnerships owned by Venture Revitalizing Investment Partnership which is managed by SBI Asset Management are to be added, SBI in total owns 1.1 million shares, roughly 14% of the total shares outstanding. SBI will be bound by lock-up period of 90 days, if the post-IPO prices were less than 150% of the IPO price, but if the market cap reaches to 100 billion to300 billion yen, SBI will reap 10 billion to 30 billion yen from market sale. A person familiar with the matter says that “SBI, who has been muddling through tight finance, will take a breath with the IPO of Reprocell”. But is that rue?

Please remember the blog of Yoshitaka Kitao on May 16th. His note of the day was titled; “Never regret on your own deed”, quoted from Musashi Miyamoto, a great maverick samurai of Edo-era. He wrote; indeed this is an order from heaven, and we must seek next gambit by concentrating, and it is important that we should not stick to the past”. What he tries to suggest? What is Kitao regretting? We can easily find the loss from Hyundai Swiss Savings Bank of Korea. He will change the name to SBI Savings Bank in July, but it remains to be a big bombshell.

As we wrote in last month’s issue, Korean FSA pointed out the bank’s capital impairment, and the managers were sacked, and SBI was forced to invest additional 20 billion yen in March by subscribing new shares. SBI could have just written off the original 800 million yen investment to the bank, but could not, because it used the Hyundai Swiss shares to frame up profits worth 1.4 billion yen in 2011, and 7.3 billion yen in 2012, by selling a small fraction to a “ hird party”—what we call as a Kitao Magic. If SBI did not comply with the capital call, the beleaguered savings bank was destined to go bankrupt, and the framed-upped shares were to be written-off. Kitao reluctantly complied with the new share placement, but alas, a Korean accountant insisted to write off the “original book value” of the SBI’s holding, thus approximately 9 billion yen loss for SBI was registered in March 2013.

A 35 billion yen Additional Capital Call

SBI had a further back luck. Korean newspapers reported in May that KFSA pointed out 376.5 billion won worth of capital is still lacking in the Hyundai Swiss, as a result of drop in Korean property prices. If SBI won’t subscribe new shares, Hyundai Swiss will be operationally suspended, and goes bankrupt. KFSA, who wants to let savings banks to be acquired by commercial banks, may welcome it.

SBI tried a cover-up, in response to the reports of Korean media, and announced: “Further loss won’t occur, as the matter is discounted in the March 2013 results announced in May 9th”. FACTA confirmed in Seoul, that the reports of Korean papers were true and genuine. Since then, SBI has been keeping silence, and Kitao wrote, as he does not regret. Is it an omen to cancel the previous announcement? As a top of a TSE-listed company, Kitao must explain to shareholders and investors, rather than writing a diary in blog. Of course, he cannot escape manager’s responsibility, even he confesses not regretting. Property prices in Korea are weakening, and SBI needs to register a loss in 1Q earnings results. SBI Securities is certainly better off as a result of active stock market, but its quarterly earnings must be maximum 10 billion yen. Thus, Reprocell is a god-sent present. But, even SBI could capture 30 billion yen from the Reprocell sale, the money would go straight into Hyundai Swiss as additional bail-out. Reprocell’s lock up period may hinder a quick sale while KFSA insists investment.

Reprocell has a sales of meager 310 million yen for March 2012, and suffering a loss of 48 million yen for April~December 2012. The full-year earnings would be break even with a slight mismatch of expenses. Reprocell’s iconoclastic popularity in the market might have been engineered by SBI’s stealth marketing troops who are active in Yahoo’s clipboards. Reprocell’s share price will be under a selling pressure from SBI, after the lock up. Day traders needs to be cautious on such an artificial market.

SBI’s plight is not limited to Hyundai Swiss. SBI Insurance, which failed to be sold to Rakuten, needed new investment from SBI amounting 1.5 billion yen in May. No one subscribes its new shares anymore to keep afloat. Quork Pharmaceuticals in America, which Bio-lover Kitao once claimed that he expected most in the company, is now concealed under umbrella of SBI Biotech in December 25, 2012, and there is no hope for exiting. Quork was supposed to make an IPO in U.S. Nasdaq with J.P. Morgan as a sponsor. It is not just IPO halted, it is very close to IPO cancellation, as few investors are interested. Quork’s debt exceeds equity by 1.16 billion yen, so it is destined to fail.

Another Three Ghost Companies

Takashi Nakagawa, ordered by Kitao to sell SBI Insurance, is busy knocking doors. Nakagawa was also ordered to sell Morning Star, another subsidiary. He knocked 33% shareholder, Morningstar in America, but supposedly got an outright rejection.

Three unknown new subsidiaries emerged in convocation notice of SBI’s general shareholders meeting. Each had a 5.754 billion yen “connected party transactions” with SBI, but we don’t know yet what was Kitao’s magic with these. His concealment after concealment will take a heavy toll in Korea soon.