Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

Seven & i Holdings Co., Ltd. is a holding company which was established through the merger of Ito-Yokado Co., Seven Eleven Japan Co., and Denny's Japan. The Company plans, manages, and operates mainly convenience stores, supermarkets, and department stores.

<ul>
<li>We would be closing our 2021 high-conviction long trade on <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a> before they release 3QFY23 results next week.</li>
<li>Although we are not expecting the company to miss consensus estimates this time around, we are expecting significant downside risks to Seven &amp; I’s US business throughout the year.</li>
<li>Given that shares went nowhere after 12% revenue and 1% OP beats in the previous quarter is a good indication that the upside is limited.</li>
</ul>


We would be closing our 2021 high-conviction long trade on Seven &amp; I Holdings (3382 JP) before they release 3QFY23 results next week.
Although we are not expecting the company to miss consensus estimates this time around, we are expecting significant downside risks to Seven &amp; I’s US business throughout the year.
Given that shares went nowhere after 12% revenue and 1% OP beats in the previous quarter is a good indication that the upside is limited.


2021 High Conviction Seven & I: Major Headwinds Deflected By The Yen Depreciation, Upside Is Limited

<ul>
<li>Following a strong third quarter the company has raised the full year revenue and OP outlook by 3.0% and 7.3% respectively due to stronger than expected overseas convenience store performance.</li>
<li>Moreover, the company continues to raise the Speedway synergies with the new medium-term plan expecting <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a> to double the EBITDA and EPS through 2020-25.</li>
<li>After rallying 65% in 1H21, shares took a breather during the last seven months. We think the timing is right to start the second half of Seven &amp; I’s rally.</li>
</ul>


Following a strong third quarter the company has raised the full year revenue and OP outlook by 3.0% and 7.3% respectively due to stronger than expected overseas convenience store performance.
Moreover, the company continues to raise the Speedway synergies with the new medium-term plan expecting Seven &amp; I Holdings (3382 JP) to double the EBITDA and EPS through 2020-25.
After rallying 65% in 1H21, shares took a breather during the last seven months. We think the timing is right to start the second half of Seven &amp; I’s rally.


Time to Get Back Into Our 2021 High Conviction Call Seven & I

HK/China Equity Long-Short

Osbert Tang, CFA

Air China Limited provides passenger, cargo, and airline-related services in China.  The Company is primarily based in Beijing and a major hub for domestic and international air transportation.  Air China's airline-related services include aircraft maintenance, repair, overhaul service, ground services, and in-flight catering services.

<ul>
<li>Our 2021 pair trade did not work well with <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> underperformed <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> by 9.9pp, but we maintain such position into 2022.</li>
<li>Much of the 2021 underperformance was incurred in 1Q21, with Air China catching up very well since then, and Dec has been the best month in this year.</li>
<li>Acceleration of international traffic, sustained cargo strength, low comparison base and upside on margin are the four factors that we see will drive Air China narrowing its performance gap.</li>
</ul>


Our 2021 pair trade did not work well with Air China Ltd (H) (753 HK) underperformed China Southern Airlines (1055 HK) by 9.9pp, but we maintain such position into 2022.
Much of the 2021 underperformance was incurred in 1Q21, with Air China catching up very well since then, and Dec has been the best month in this year.
Acceleration of international traffic, sustained cargo strength, low comparison base and upside on margin are the four factors that we see will drive Air China narrowing its performance gap.


Roundup of 2021 High Conviction: Still Expect Air China (753 HK) To Outperform CSA (1055 HK) In 2022

<ul>
<li>Our 2021 High Conviction call, <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a> delivered 2QFY22 results yesterday with revenue surpassing consensus estimate by around 9.7%. The company’s 2QFY22 operating income was 8% below consensus.</li>
<li>Although Q2 results seemed a bit weak on profitability with 0.3% YoY growth, we think it was driven mainly by a temporary rise in SG&amp;A costs in the overseas convenience stores business due to the completion of the Speedway acquisition.</li>
<li>The initial price reaction to results was negative. Yet we think it's mostly down to the overall weaknesses in the Japanese market.</li>
<li>Nevertheless, there are many positives to look forward to in the near term as the increase in the Speedway synergies, strong growth in America and the expansion into India could provide an impetus for Seven &amp; I to break the resistance, which is currently at around the ¥5,400 level.</li>
</ul>


Our 2021 High Conviction call, Seven &amp; I Holdings (3382 JP) delivered 2QFY22 results yesterday with revenue surpassing consensus estimate by around 9.7%. The company’s 2QFY22 operating income was 8% below consensus.
Although Q2 results seemed a bit weak on profitability with 0.3% YoY growth, we think it was driven mainly by a temporary rise in SG&amp;A costs in the overseas convenience stores business due to the completion of the Speedway acquisition.
The initial price reaction to results was negative. Yet we think it's mostly down to the overall weaknesses in the Japanese market.
Nevertheless, there are many positives to look forward to in the near term as the increase in the Speedway synergies, strong growth in America and the expansion into India could provide an impetus for Seven &amp; I to break the resistance, which is currently at around the ¥5,400 level.


2021 High Conviction: Seven & I Raises Speedway Synergies & India Expansion Could Break The Deadlock

<ul>
<li>The awaited closure of the Speedway acquisition was announced on 26<sup>th</sup> June 2021, after clearance was received from the FTC. Before this, there were question marks regarding <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1041:1" rel="noopener">Seven &amp; I Holdings (3382 JP)</a>’s Speedway acquisition, as the acting chairperson Rebecca Kelly Slaughter and Commissioner Rohit Chopra of the US Federal Trade Commission issued a statement on the FTC website on May 14th, 2021, saying that this transaction is illegal as it could impact competition and cause prices to soar at gas stations and convenience stores across the US.</li>
<li>As promised during the previous quarterly results release, Seven &amp; I published its new medium term plan for 2021-25 on the 1<sup>st</sup> of July 2021, after the closure of the Speedway acquisition.</li>
<li>We think the new medium term plan provides plenty of surprises to the upside, providing sufficient support to break the previous all-time high of ¥5,906 per share in the immediate future.</li>
<li>Nonetheless, the ¥5,900-6,000 per share range could offer some resistance for a short while, but we remain bullish on Seven &amp; I and maintain our previous target of an additional 50% upside to the current price, as we think that there is still plenty of room for multiple expansion alongside impending earnings upgrades.</li>
</ul>


The awaited closure of the Speedway acquisition was announced on 26th June 2021, after clearance was received from the FTC. Before this, there were question marks regarding Seven &amp; I Holdings (3382 JP)’s Speedway acquisition, as the acting chairperson Rebecca Kelly Slaughter and Commissioner Rohit Chopra of the US Federal Trade Commission issued a statement on the FTC website on May 14th, 2021, saying that this transaction is illegal as it could impact competition and cause prices to soar at gas stations and convenience stores across the US.
As promised during the previous quarterly results release, Seven &amp; I published its new medium term plan for 2021-25 on the 1st of July 2021, after the closure of the Speedway acquisition.
We think the new medium term plan provides plenty of surprises to the upside, providing sufficient support to break the previous all-time high of ¥5,906 per share in the immediate future.
Nonetheless, the ¥5,900-6,000 per share range could offer some resistance for a short while, but we remain bullish on Seven &amp; I and maintain our previous target of an additional 50% upside to the current price, as we think that there is still plenty of room for multiple expansion alongside impending earnings upgrades.


2021 High Conviction Update: Raises Speedway Synergies, But Leaves Enough Room For Future Upside