'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/378/original/2020-08-08_12-56-11.png?1596858996" class="editor-image img-responsive" data-smartkarma-image-id="151378"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>30x</strong> - Following Friday's 'peak' in this quarter's results announcements, our prediction that the market multiple would exceed 30 times by months end, occurred in one week, and aggregate forecast operating and net profits are now ¥4.3 trillion and ¥4.6 trillion lower than at the end of last month. A large number of companies that previously had avoided making full-year forecasts three months ago are now doing so, hastening the decline. The last time the market aggregate multiple was above 30 times was just before "3/11" when net income and total market value were both half the current values. Other than the 2008/9 financial crisis, the market multiple rarely exceeded 25 times in the prior decade.  </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/387/original/2020-08-08_15-39-59.png?1596868850" class="editor-image img-responsive" data-smartkarma-image-id="151387"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>-40%</strong> - Forecast full-year revenues are 10% lower than a year ago, and forecast operating profits are 40% below the level of August 2019. Forecast operating margins, at 4.8%, are 300 basis points below the peak of September 2018. Net margins are to decline by 318 bps to 2.7% as net income forecasts are half those of a year ago.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/388/original/2020-08-08_15-45-35.png?1596869157" class="editor-image img-responsive" data-smartkarma-image-id="151388"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>SECTOR FORECASTS</strong> - Four Sectors are forecasting full-year losses - <strong>Energy</strong>, <strong>Metals</strong>, <strong>Restaurants</strong> and <strong>Consumer Services</strong>, although<strong> Metals</strong> appears to be bottoming out. Only the Healthcare Sector has seen any operating margin improvement; however, that modest change is now well discounted. <strong>Autos</strong>,<strong> Utilities</strong>, and<strong> Transportation</strong> have seen 100 bps year-on-year forecast operating margin declines, but are still expecting to be in the black. The<strong> Information Technology</strong> and<strong> Non-Bank Finance</strong> (mostly Insurance) Sectors are forecasting 'flat'.</p><p style="text-align: center;"><strong>•BEST &amp; WORST 7th AUGUST •</strong></p><p style="text-align: left;">The 'best' of Friday's large-cap announcements came from <a href="https://www.smartkarma.com/entities/mixi-inc" target="_blank" data-smartkarma-citation="entities:602:1" rel="noopener">mixi (2121 JP)</a> and <a href="https://www.smartkarma.com/entities/t-d-holdings-inc" target="_blank" data-smartkarma-citation="entities:3431:1" rel="noopener">T&amp;D Holdings (8795 JP)</a>; the worst from <a href="https://www.smartkarma.com/entities/daiichikosho-co-ltd" target="_blank" data-smartkarma-citation="entities:8629:1" rel="noopener">Daiichikosho (7458 JP)</a> and <a href="https://www.smartkarma.com/entities/kyoritsu-maintenance-co-ltd" target="_blank" data-smartkarma-citation="entities:19645:1" rel="noopener">Kyoritsu Maintenance (9616 JP)</a>.  More extensive coverage follows in the <strong>DETAIL</strong> section below.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/389/original/2020-08-08_16-30-24.png?1596871844" class="editor-image img-responsive" data-smartkarma-image-id="151389"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/390/original/2020-08-05_07-34-43.png?1596872118" class="editor-image img-responsive" data-smartkarma-image-id="151390"></figure><p></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/391/original/2020-08-08_16-37-27.png?1596872258" class="editor-image img-responsive" data-smartkarma-image-id="151391"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/151/392/original/2020-08-08_16-38-12.png?1596872310" class="editor-image img-responsive" data-smartkarma-image-id="151392"></figure><div class="content-caption">Source • Japan Analytics</div><div><hr></div><div><p style="text-align: center;"><strong>DAILY STATS</strong></p></div><hr><div><p><strong>PERCENTAGES</strong> -<strong> 65%</strong> of quarterly results,<strong>  76</strong>% of annual forecasts/revisions and <strong>80</strong>% of interim forecasts have negative Scores and<strong> 28%</strong> of companies reporting lost money for the quarter.</p></div><hr><div><p style="text-align: center;"><strong>663 Quarterly Results</strong></p></div><div><ul>
<li>
<strong>Results Score:</strong> 29% Positive / 6% Neutral / 65% Negative</li>
<li>
<strong>Average Results Score Change:</strong> -3.4 points</li>
<li>
<strong>Average % Change in Revenue:</strong> -10.4% Quarter YoY / -2.2% Rolling TTM YoY </li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -1.3 ppt</li>
<li>
<strong>Percentage Making Quarterly Losses:</strong> 28%</li>
</ul></div><hr><div><p style="text-align: center;"><strong>196 Annual • 123 Interim Forecasts/Revisions</strong></p></div><div><ul>
<li>
<strong>Annual Forecast/Revision Score:</strong> 19% Positive / 5% Neutral / 76% Negative</li>
<li>
<strong>Interim Forecast/Revision Score Change: </strong>19% Positive / 1% Neutral / 80% Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -10.9 points</li>
</ul></div>

Source • Japan Analytics30x - Following Friday's 'peak' in this quarter's results announcements, our prediction that the market multiple would exceed 30 times by months end, occurred in one week, and aggregate forecast operating and net profits are now ¥4.3 trillion and ¥4.6 trillion lower than at the end of last month. A large number of companies that previously had avoided making full-year forecasts three months ago are now doing so, hastening the decline. The last time the market aggregate multiple was above 30 times was just before "3/11" when net income and total market value were both half the current values. Other than the 2008/9 financial crisis, the market multiple rarely exceeded 25 times in the prior decade.  Source • Japan Analytics-40% - Forecast full-year revenues are 10% lower than a year ago, and forecast operating profits are 40% below the level of August 2019. Forecast operating margins, at 4.8%, are 300 basis points below the peak of September 2018. Net margins are to decline by 318 bps to 2.7% as net income forecasts are half those of a year ago.Source • Japan AnalyticsSECTOR FORECASTS - Four Sectors are forecasting full-year losses - Energy, Metals, Restaurants and Consumer Services, although Metals appears to be bottoming out. Only the Healthcare Sector has seen any operating margin improvement; however, that modest change is now well discounted. Autos, Utilities, and Transportation have seen 100 bps year-on-year forecast operating margin declines, but are still expecting to be in the black. The Information Technology and Non-Bank Finance (mostly Insurance) Sectors are forecasting 'flat'.•BEST &amp; WORST 7th AUGUST •The 'best' of Friday's large-cap announcements came from mixi (2121 JP) and T&amp;D Holdings (8795 JP); the worst from Daiichikosho (7458 JP) and Kyoritsu Maintenance (9616 JP).  More extensive coverage follows in the DETAIL section below.Source • Japan AnalyticsDAILY STATSPERCENTAGES - 65% of quarterly results,  76% of annual forecasts/revisions and 80% of interim forecasts have negative Scores and 28% of companies reporting lost money for the quarter.663 Quarterly Results

Results Score: 29% Positive / 6% Neutral / 65% Negative

Average Results Score Change: -3.4 points

Average % Change in Revenue: -10.4% Quarter YoY / -2.2% Rolling TTM YoY 

Average Operating Profit Margin Change: -1.3 ppt

Percentage Making Quarterly Losses: 28%
196 Annual • 123 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 19% Positive / 5% Neutral / 76% Negative

Interim Forecast/Revision Score Change: 19% Positive / 1% Neutral / 80% Negative

Average Forecast/Revision Score Change: -10.9 points


🇯🇵 JAPAN • Results & Revisions 7th August - MS&AD, Mixi, SMC, Otsuka, Kyoritsu M, Hoshizaki, HDS

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/496/original/2020-06-30_14-16-44.png?1593494217" class="editor-image img-responsive" data-smartkarma-image-id="143496"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<p><strong>THE CASH CONVERSION CYCLE</strong> - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to generate cash and is also known as the Cash Conversion Cycle. In practice, Net Working Capital is scaled by the number of days of Revenue or Cost of Goods Sold that are 'tied' up in three components - Receivables, Inventory, and Payables.</p>
<p><strong>Net Working Capital Days</strong> varies by industry and the lower the number, the better. Amounts over 210 days are excessive, and a sign of business stress.  Net Working Capital is defined as:-</p>
<ul>
<li>
<strong>+ Receivables/Revenue </strong>- the average number of days required to collect on sales. Businesses usually extend a degree of credit to non-cash customers.  Receivables Days over 100 are excessive.</li>
<li>
<strong>+ Inventory/Cost of Goods Sold -</strong> the average number of days it takes to sell out of Inventory. Amounts vary widely by industry but days over 210 are excessive.</li>
<li>- <strong>Payables/Cost of Goods Sold -</strong>the average number of days the company takes to settle transactions with suppliers. By extending nominally interest-free credit, suppliers provide operating leverage to a business. A larger negative number is better, but days less than -100 are excessive.</li>
</ul>
<p>The relationship between Receivables and Payables should also be considered particularly where the company is giving more generous credit terms to its customers than it receives from its suppliers. The Cash Conversion Cycle for the aggregate of all non-financial currently-listed Japanese companies has averaged 77 days over the last thirty years. However, over the previous twelve months., a fourteen-day rise in Inventory Days during the last four years has pushed Net Working Capital Days to 93.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/529/original/2020-06-30_15-09-41.png?1593497395" class="editor-image img-responsive" data-smartkarma-image-id="143529"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/530/original/2020-06-30_15-10-32.png?1593497471" class="editor-image img-responsive" data-smartkarma-image-id="143530"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<div class="content-caption"></div>
<p><strong>NET WORKING CAPITAL DAYS AS A STRESS TEST</strong> - The correlation between Net Working Capital Days and relative performance varies by company and by Sectors. The examples above show how signals can be heeded -  <a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon (7731 JP)</a>, or ignored - <a href="https://www.smartkarma.com/entities/smc-corp" target="_blank" data-smartkarma-citation="entities:20866:1" rel="noopener">SMC (6273 JP)</a> since 2018. (For more on SMC working capital issues, please see my colleague <a href="https://www.smartkarma.com/profiles/scott-foster" target="_blank" data-smartkarma-citation="accounts:1134" rel="noopener">Scott Foster</a>'s Insight of last year - <a href="https://www.smartkarma.com/insights/smc-6273-jp-getting-in-line-with-reality" target="_blank" data-smartkarma-citation="insights:30081" rel="noopener">SMC (6273 JP): Getting in Line with Reality</a>).   </p>
<p>For this Insight, we have limited our review to larger capitalisation manufacturing companies. In the<strong> DETAIL</strong> section below, we shall cover the outliers at both ends of <strong>Receivables Days</strong>, <strong>Inventory Days</strong>, <strong>Payables Days</strong>, and finally <strong>Net Working Capital Days</strong>.</p>


Source • Japan Analytics
THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to generate cash and is also known as the Cash Conversion Cycle. In practice, Net Working Capital is scaled by the number of days of Revenue or Cost of Goods Sold that are 'tied' up in three components - Receivables, Inventory, and Payables.
Net Working Capital Days varies by industry and the lower the number, the better. Amounts over 210 days are excessive, and a sign of business stress.  Net Working Capital is defined as:-


+ Receivables/Revenue - the average number of days required to collect on sales. Businesses usually extend a degree of credit to non-cash customers.  Receivables Days over 100 are excessive.

+ Inventory/Cost of Goods Sold - the average number of days it takes to sell out of Inventory. Amounts vary widely by industry but days over 210 are excessive.
- Payables/Cost of Goods Sold -the average number of days the company takes to settle transactions with suppliers. By extending nominally interest-free credit, suppliers provide operating leverage to a business. A larger negative number is better, but days less than -100 are excessive.

The relationship between Receivables and Payables should also be considered particularly where the company is giving more generous credit terms to its customers than it receives from its suppliers. The Cash Conversion Cycle for the aggregate of all non-financial currently-listed Japanese companies has averaged 77 days over the last thirty years. However, over the previous twelve months., a fourteen-day rise in Inventory Days during the last four years has pushed Net Working Capital Days to 93.


Source • Japan Analytics

NET WORKING CAPITAL DAYS AS A STRESS TEST - The correlation between Net Working Capital Days and relative performance varies by company and by Sectors. The examples above show how signals can be heeded -  Nikon (7731 JP), or ignored - SMC (6273 JP) since 2018. (For more on SMC working capital issues, please see my colleague Scott Foster's Insight of last year - SMC (6273 JP): Getting in Line with Reality).   
For this Insight, we have limited our review to larger capitalisation manufacturing companies. In the DETAIL section below, we shall cover the outliers at both ends of Receivables Days, Inventory Days, Payables Days, and finally Net Working Capital Days.

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Event-Driven

<p>Since the 17<sup>th</sup> of March we have published several notes regarding skews in performance between names that have heavy weights in TOPIX vs. those with heavy weights in the Nikkei. While it has required some very nimble trading the alpha generation if you were on the right side of the trades has been exceptionally good. We summarise the performance of the names we have highlighted and our thoughts on when to close out these trades below.</p>

Since the 17th of March we have published several notes regarding skews in performance between names that have heavy weights in TOPIX vs. those with heavy weights in the Nikkei. While it has required some very nimble trading the alpha generation if you were on the right side of the trades has been exceptionally good. We summarise the performance of the names we have highlighted and our thoughts on when to close out these trades below.

Taking Stock of the Almost Excessive Alpha Generation From TOPIX-Nikkei Skew Trades

<p>With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to favour TOPIX-based ETFs over Nikkei-based ETFs it made sense for TOPIX to outperform Nikkei today. However, we found the degree of outperformance to be slightly surprising as TOPIX rose 2.60% while the Nikkei barely squeaked out a +0.06% gain. Below, we examine some individual names within the two indices to try and identify pairs which could generate alpha based on this theme.</p>

With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to favour TOPIX-based ETFs over Nikkei-based ETFs it made sense for TOPIX to outperform Nikkei today. However, we found the degree of outperformance to be slightly surprising as TOPIX rose 2.60% while the Nikkei barely squeaked out a +0.06% gain. Below, we examine some individual names within the two indices to try and identify pairs which could generate alpha based on this theme.

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/590/original/2020-02-13_03-51-57.png?1581538303" class="editor-image img-responsive" data-smartkarma-image-id="117590"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>12TH FEBRUARY ROUNDUP</strong> - 272 results and 122 revisions announcements were made yesterday. Our Results Score declined by another 18 basis points to reach -0.65, while the Forecast /Revision  Score added 6bps thanks to upbeat initial FY2020 forecasts from <a href="https://www.smartkarma.com/entities/shimano-inc" target="_blank" data-smartkarma-citation="entities:3777:1" rel="noopener">Shimano (7309 JP)</a> and <a href="https://www.smartkarma.com/entities/yamaha-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:7411:1" rel="noopener">Yamaha Motor (7272 JP)</a>.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/591/original/2020-02-13_03-58-17.png?1581538602" class="editor-image img-responsive" data-smartkarma-image-id="117591"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>SECTOR TIMELINE</strong> - This quarter's Sector winners and losers are now becoming more apparent. in the former camp are <strong>Banks</strong>, <strong>Energy</strong>,  <strong>Tech Hardware</strong>, <strong>Food, Beverages &amp; Tobacco</strong>, and <strong>Non-Bank Finance,</strong> while the latter includes<strong> Other Commercial Products</strong>, <strong>Transportation &amp; Logistics</strong>, <strong>Chemicals</strong>, <strong>Building Materials</strong>, and <strong>Media</strong>. The largest one-day changes were in <strong>Energy</strong> (<a href="https://www.smartkarma.com/entities/inpex-corp" target="_blank" data-smartkarma-citation="entities:20665:1" rel="noopener">Inpex (1605 JP)</a>) and <strong>Telecommunications</strong> (<a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a>).  825 companies have yet to report, of which 385 are due today and a similar number on Friday.</p>

Source • Japan Analytics12TH FEBRUARY ROUNDUP - 272 results and 122 revisions announcements were made yesterday. Our Results Score declined by another 18 basis points to reach -0.65, while the Forecast /Revision  Score added 6bps thanks to upbeat initial FY2020 forecasts from Shimano (7309 JP) and Yamaha Motor (7272 JP).Source • Japan AnalyticsSECTOR TIMELINE - This quarter's Sector winners and losers are now becoming more apparent. in the former camp are Banks, Energy,  Tech Hardware, Food, Beverages &amp; Tobacco, and Non-Bank Finance, while the latter includes Other Commercial Products, Transportation &amp; Logistics, Chemicals, Building Materials, and Media. The largest one-day changes were in Energy (Inpex (1605 JP)) and Telecommunications (Softbank Group (9984 JP)).  825 companies have yet to report, of which 385 are due today and a similar number on Friday.

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 12th February ▲9449 6273 7309 ▼ 3769 6367 4324

Japan

SMC CORPORATION manufactures directional control devices such as power, hand, and air valves.  The Company also produces air filters, cylinders, and actuators along with other pneumatic equipment.  SMC seeks to become a comprehensive maker of automated equipment through the market demand of information and communications products.

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SMC Corp (6273 JP)

🇯🇵 JAPAN • Results & Revisions 7th August - MS&AD, Mixi, SMC, Otsuka, Kyoritsu M, Hoshizaki, HDS

30x - Following Friday's 'peak' in this quarter's results announcements, our prediction that the market multiple would exceed 30 times by months...

Campbell Gunn

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to...

Campbell Gunn

Taking Stock of the Almost Excessive Alpha Generation From TOPIX-Nikkei Skew Trades

Since the 17th of March we have published several notes regarding skews in performance between names that have heavy weights in TOPIX vs. those...

Mio Kato

The Topix Vs. Nikkei Skew

With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to...

Mio Kato

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 12th February ▲9449 6273 7309 ▼ 3769 6367 4324

12TH FEBRUARY ROUNDUP - 272 results and 122 revisions announcements were made yesterday. Our Results Score declined by another 18 basis points to...

Campbell Gunn

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