WSJ: Todai Startups

TOKYO—The University of Tokyo, long considered a breeding ground for Japan’s political and business elite, is venturing into new terrain: entrepreneurship.

The nation’s most prestigious university, known as Todai, has produced more than a dozen prime ministers and most of the top officials at government ministries. But in recent years, the 138-year-old school has been working to shake its conservative image and bring some Silicon Valley spirit to its campus, in line with Prime Minister Shinzo Abe’s hopes to transform educational institutions into centers of innovation.

The university counts about 240 startups affiliated with it in some way, double the figure five years ago. Sixteen have gone public, with a combined market capitalization of about $8 billion.

Todai’s efforts suggest Japan is finally embracing entrepreneurs as its once-dominant technology industry contends with decline on many fronts. But there is still much catching up to do.

Last year, Japanese venture-capital investments totaled $940 million, according to the Tokyo-based Venture Enterprise center. That compares with the $48 billion invested by venture capitalists in the U.S., according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association.

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“Todai graduates often find careers in the government or large corporations,” saidTomotaka Goji, president of University of Tokyo Edge Capital, a venture-capital firm that invests in technology startups. “But I’m sensing a change in attitude. I’m witnessing many more people who seriously consider working for or starting a venture business an appealing career choice.”

Mr. Goji’s office is located in a modern five-story building sitting on the southern edge of the university’s main campus in central Tokyo. Funded by institutional investors independent of Todai, UTEC manages about ¥30 billion, or roughly $250 million, in venture-capital funds.

The building is also home to a Todai subsidiary that handles licensing of technologies developed at the university. As the number of ventures grow, patent revenue has more than tripled since 2010 to ¥488 million in 2014.

Shigeo Kagami, a Todai professor who works with the commercial entities to support entrepreneurs, said Todai often receives equity in return for licensing university-developed technology to startups, which can be a valuable asset if companies successfully list their shares.

“That has helped Todai warm up to the idea of entrepreneurship—it realized it could be profitable,” he said.

The 240 affiliated startups counted by the university include those led by faculty or former students and those built around research conducted at Todai. So far, most of the students starting ventures come from the university’s graduate departments—an indication that Todai undergraduates still mostly prefer more-secure jobs in government or big business.

Tao Cheng was enrolled in a University of Tokyo master’s degree program in 2008 when he started popIn Inc., an online ad company. The Chinese student raised ¥40 million from UTEC to fund his startup and based his office in Todai’s Entrepreneur Plaza, an incubation facility home to more than 20 startups.

“From funding to office space to free legal advice, I don’t think there’s anyone else who has taken fuller advantage of the university’s startup support system than myself,” said Mr. Cheng.

In June, China’s Baidu Inc., operator of the world’s second-largest search engine, bought popIn for between ¥1 billion and ¥2 billion, or between $8 million and $16 million, according to Mr. Cheng, who declined to give the precise amount but suggested a range.

ENLARGE

Other ventures with a Todai connection include PeptiDream Inc., a biotechnology company that has drug-discovery partnerships with large U.S. and European drug makers based on technology developed by Todai professor Hiroaki Suga. And Schaft, a robotics company started at the university, made headlines in 2013 when it dominated a robotics competition sponsored by the U.S. Defense Department’s research arm. Google Inc. had snapped up Schaft shortly before the competition for an undisclosed sum.

Despite being ahead of the pack in Japan, Todai is still no match to American universities such as Stanford, which alone boasts thousands of companies started by its alumni and faculty. Google, co-founded byLarry Page and Sergey Brin when they were enrolled in Stanford’s doctoral program, is now valued at roughly $440 billion.

“Plenty of students enter Stanford not planning to become entrepreneurs, but by interacting with so many alumni and ecosystem players, they get interested,” said Kenji Kushida, a researcher at Stanford who leads a project that seeks to help Japan build closer connections to Silicon Valley and learn from it.

Mr. Kushida said even Stanford graduates with little interest in becoming entrepreneurs get pulled into startups years down the road, once they gain skills and interact with fellow alumni. Japan needs to create similar opportunities for interaction, he said.

Dr. Kagami of Todai agreed that not everyone nurtures the startup spirit while in school.

“But there are great role models out there, and 10 remarkable entrepreneurs are enough to make a difference,” he said.

Write to Alexander Martin at alexander.martin@wsj.com

Mantra

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1 recital is 3s
10m times
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It will take 347 days

EM Debt from WSJ

China, Brazil, India and Mexico were among the top issuers of local-currency debt, according to the World Bank. Only 1.7% of China’s renminbi-denominated debt was owned by foreigners, in part reflecting the country’s nascent fixed-income market. But in Mexico, Poland, Indonesia, Malaysia and South Africa, foreign investors held more than 30% of their local debt as of the end of 2013.

FT: Brazil, Dilma 66 per cent of Brazilians want Ms Rousseff impeached.

It is sometimes said that Brazil tries every approach to economics until it finally chooses the right one. Over the past 60 years, the country has been just as creative in the way it removes presidents too. Getúlio Vargas was driven to suicide; Jânio Quadros was forced to pack it in; João Goulart was deposed in a military coup; and Fernando Collor de Mello was impeached on corruption charges. Many wonder if Dilma Rousseff, elected for a second term eight months ago, might face a similar fate.

The reasons for her precarious position are clear. A sprawling corruption scandal at Petrobras, pursued with admirable vigour by independent prosecutors, has revealed just how venal Brazil’s politicians, especially the ruling Workers party, have become; more than $2bn was stolen in kickbacks from the state-controlled energy company.

As Ms Rousseff chaired Petrobras when much of the corruption took place, she can be blamed at least of gross incompetence.

In addition, there is her dismal economic record. The economy has hit the buffers, with the recession forecast to last through 2016 at least. In the meantime, the currency is sliding, investment has collapsed, inflation is twice the official target, investor confidence has evaporated and unemployment is rising. No wonder there were mass protests across Brazil on Sunday — or that 66 per cent of Brazilians want Ms Rousseff impeached.

China Skiing

Of those, the vast majority go for less than a day, with fewer than 300,000 people taking an overnight ski trip and just over 20,000 people each year staying for more than a week, according to Benny Wu, who runs ski resort operational management at Wanda Cultural Industry Group, a subsidiary of one of China’s largest property developers.

A year ago China had an estimated 350 ski resorts but this coming season there are expected to be around 450, as local governments all over the country try to cash in on the boost from the Winter Olympics. Facilities have improved a bit since my early days at Beidahu but, according to Vanat, fewer than 20 of China’s resorts come anywhere close to western or Japanese industry standards.

FT: Pearson

August 12, 2015 5:11 pm

Pearson investors wary of acquisitions

Henry Mance, Media Correspondent

 Some question use of £1.3bn from FT and Economist sales

©PA

T

he Château Latour vineyard went in 1989, the waxworks of Madame Tussauds were sold nine years later, followed by investments in Lazard and the TV production company that made Baywatch. 

Now, Pearson has parted with two of its last trophy assets: the Financial Times and a 50 per cent stake in the publisher of the Economist, for a combined £1.3bn. 

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But if John Fallon, Pearson’s chief executive, thought that a narrower focus would automatically win over investors, he may be disappointed. 

Shares in Pearson, the world’s largest education company, have fallen by one-fifth since the end of March. Even selling the FT Group and the Economist Group stake for more than most analysts’ valuations of the businesses failed to buck the trend.

“It is intriguing,” says David Reynolds, an analyst at Jefferies. “There is a perception that the impact of technology — and all things digital — is yet to run its course in educational publishing.”

Some investors are questioning Pearson’s ability to benefit from this after four years without organic revenue growth. While the company now has the cash for large acquisitions, doubts surround its ability to buy shrewdly. 

“There’s the glare of investors on them,” says one top 10 shareholder. “We’ve sat down and spoken to them about returns [on acquisitions].”

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How the FT falcon flew to Nikkei’s nest

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Another major shareholder warns: “There’s a lot of spaghetti to be sorted out, particularly in the US . . . The last thing you want to do at the moment is throw another acquisition in.”

Mr Fallon says Pearson is “on the brink of another period of concerted underlying growth”. He is trying to reframe Pearson into a pure education company that can roll out software globally, and sell more expensive learning systems instead of textbooks.

“Old Pearson” — as one analyst fondly remembers the company between about 2005 and 2010 — was buoyed by government spending on education and economic growth, and contract wins in the US. It spent billions of pounds acquiring businesses in digital education and emerging markets.

Since then, however, the company has come up against three strong headwinds.

First is what the company describes as cyclical pressures, mainly in the US, where the group derived 60 per cent of its £4.9bn in revenues last year. These include an economic recovery that is too early-stage to drive college enrolments, and political opposition in some states to Common Core — a federal government-backed plan to implement common school standards across the country, for which Pearson is a key supplier.

Last month, Pearson said the pressures were “slightly worse overall than we expected at the start of the year”. Morgan Stanley analysts concluded that the “prospects of a cyclical upturn in 2016 look weaker” — noting that further US states could drop out of the Common Core programme.

Second is the shift from printed textbooks and materials to digital products and learning services. Pearson completed a two-year restructuring plan at the end of last year, which involved closing some book warehouses and reshaping sales teams. But this may not be enough, given that other media companies have struggled to make money from digital formats, says Simon Baker, an analyst at Société Générale. 

Third is the legacy of rapid acquisitions, which has left Pearson with a variety of technologies and infrastructures. It has some 50 data centres in the US, and its learning software has often been built differently. Mr Fallon says this “spaghetti” will largely be untangled by the end of 2017, leading to lower technology costs and higher profit margins from the following year.

He argues that Pearson now has four areas of focus that will drive growth: virtual schools; online universities; private language schools, such as Wall Street English in China; and higher education coursework, including digital materials.

Investing in these products is Pearson’s priority. “They today make up half of our revenues; they will soon be 75 per cent,” Mr Fallon says.

Claudio Aspesi, an analyst at Bernstein, says Pearson is “finally addressing the integration of digital education businesses into a coherent set of products and services”.

Since 2010, Pearson has spent £2.8bn in cash on acquisitions. Two of the biggest — language school chain Grupo Multi and SEB, which sells learning systems — were in Brazil, a market championed by Mr Fallon that subsequently went into recession. 

Mr Fallon has sought to assure investors that Pearson is “not in a rush” to make more purchases. Before 2010 “we were pushing the boundaries a little”, Mr Fallon admitted. Now he says: “We’re not looking at virgin territory. We’re looking at adding to growth platforms that we’ve already got.”

Some analysts have already poured cold water on one rumoured purchase: the education software company Blackboard — whose private equity owners are eyeing a multibillion dollar exit. It seems it will not be on Pearson’s list of targets if it does start spending its cash.

. . . And then there was one

After selling the FT Group and the Economist Group stake, Pearson will have one remaining media asset — a 47 per cent stake in publisher Penguin Random House, over which it has a sell option from July 2016. Pearson has suggested it may keep the stake until at least 2017, when synergies from the integration of PRH are expected to materialise. Nonetheless, the cash is expected at some point. “We all know what they’re going to do ultimately,” said one top 10 shareholder. In the medium term Pearson may look to return cash via buybacks and special dividends, Mr Fallon said. That would break with the company’s long-held policy —— but may help demonstrate discipline to investors.

EM Debt

JPMorgan’s analysis suggests that the debt burdens of emerging market companies and households have jumped from 73 per cent of GDP in 2007 to 106 per cent at the end of 2014, virtually as high as in the developed world, where private sector debt levels have been falling (see the first chart).

“In previous research, the IMF found that an increase in the ratio of credit to GDP of five percentage points or more in a single year signals a heightened risk of an eventual financial crisis,” says Joseph Lupton, senior global economist at JPMorgan.

“Nearly half [of the EM countries analysed] have registered sustained increases at close to this amount over the entire period.”

Moreover, although the figures include domestic bank credit, cross-border loans extended to the non-bank private sector and debt securities issued by non-financial companies, it does not include shadow banking, due to a lack of data in many countries.

As a result, JPMorgan estimates that it is understating total private credit by around 10 per cent.

“After seven years of a credit binge fuelled by easy money from the Fed the tide is going out and what’s going to be left to see is the quality of assets that have been bought over this period. There are going to be plenty of assets that are not going to be able to weather the Fed rate-hiking process.”

Mr Lupton admits to being downbeat on the global economy as a whole, given that emerging markets now account for around 40 per cent of GDP, around twice the level during the 1997-98 EM crises, meaning a slowdown will have a greater effect on the world at large.

The problem is most acute in Asia. Hong Kong, at 293.2 per cent, and Singapore, 178.9 per cent, have the highest ratios of private non-financial credit to GDP, although their status as regional financial centres, with a concentration of banking and capital markets activity, may skew the figures somewhat.

But even apart from this duo, the highest ratios are found in Asian countries such as Malaysia (170.7 per cent), South Korea (167.2 per cent), mainland China (147.1 per cent) and Thailand (134.4 per cent), as the second chart shows.

Hong Kong and Singapore have also seen the largest rises in their private non-financial credit to GDP ratios since the end of 2007, with Hong Kong’s level rising by 110.5 percentage points (to $868bn) and Singapore’s by 63.3 points (to $541bn).

Aside from these two, mainland China stands out. It has seen the largest rise in debt levels since 2007, of 42.7 percentage points, and has by far and away the largest stock of private non-financial sector debt in dollar terms, some $14.97tn, more than half of the $26.38tn of such debt in the 20 EM countries analysed by JPMorgan.

The next largest stocks of debt were found in South Korea ($2.3tn), Brazil ($1.61tn) and India ($1.2tn).

Turkey, Thailand and Brazil have also seen rises of more than 30 percentage points in their debt ratio since the global financial crisis, figures Mr Lupton describes as “very big”.

Hungary, South Africa and Argentina were the only three of the 20 countries to see a fall in this measure. Argentina has the lowest ratio overall (15.4 per cent of GDP), followed by Mexico and Indonesia.

http://www.ft.com/cms/s/3/7c0a4fc2-3f55-11e5-b98b-87c7270955cf.html#ixzz3ig7SlWEH

However, JPMorgan’s analysis suggests only around 8 per cent of the debt is foreign currency-denominated, lessening fears over rising repayments as emerging market currencies continue to weaken against the dollar.

In China, this figure is only around 2 per cent, although this still equates to about $300bn of debt.

The highest proportions of foreign currency-denominated private debt are believed to be in Mexico (47 per cent), Hungary (43 per cent), Singapore (40 per cent), Turkey (27 per cent) and Brazil (23 per cent).

JPMorgan’s central forecast is that the Federal Reserve will raise rates by 175 basis points by the end of 2016, almost double market expectations of around 100bp.

Gold costs

Source: FT
The recent gold price fall means more trouble ahead for gold miners. The all-inclusive cost to produce gold is about $1,000. If gold prices fall below $1,000, some gold reserves (assets) would be unprofitable to recover and need to be written down, putting pressure on the more indebted miners.

http://www.ft.com/cms/s/3/ffc1faba-3cdd-11e5-bbd1-b37bc06f590c.html#ixzz3iTxVT8PG
Gold cannot fall forever. Even so, listed gold miners should at some point be cheap. One early buy signal is when it costs less to buy mines on the stock market than to build them. Building a gold mine from scratch can be measured, crudely, by the cost of the investment (including debt) an ounce of gold produced. An average new mine would cost $2,500 an ounce of annual output, estimates RBC. Yet the larger listed gold miners still have an average enterprise value to production of $3,600.