Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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.

Event-Driven

The Nikkei reported today that Kioxia would be postponing its much-anticipated IPO due to US-China tensions. That is an interesting fig-leaf in our opinion, or a decidedly creative take on the idea that the IPO was priced extremely richly. We question whether postponing the IPO further will lead to greater returns down the road. We feel there is downside risk for Toshiba.

The Nikkei reported today that Kioxia would be postponing its much-anticipated IPO due to US-China tensions. That is an interesting fig-leaf in our opinion, or a decidedly creative take on the idea that the IPO was priced extremely richly. We question whether postponing the IPO further will lead to greater returns down the road. We feel there is downside risk for Toshiba.

Toshiba – Kioxia’s Postponed IPO Is NOT About US-China Tensions and That Means More Downside Risk

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Kioxia Holdings  / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/kioxia" target="_blank" data-smartkarma-citation="entities:29243:1" rel="noopener">Kioxia (6600 JP)</a> is the world’s second-largest player in the NAND flash memory market. Kioxia was spun off from <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> and acquired by KK Pangea, a special purpose company formed by a consortium led by Bain Capital for JPY2 trillion ($18 billion). Kioxia announced a tentative price range of JPY2,800-3,500 a share, materially below the JPY3,960 indicative price announced in August. The shares will list on the Tokyo Stock Exchange on 6 October. In <a href="https://www.smartkarma.com/insights/kioxia-ipo-initiation-not-just-a-flash-in-the-pan" target="_blank" rel="noopener">our initiation note</a>, we stated that for investors willing to play the cycle, we think that Kioxia's fundamentals offer more positives than negatives. However, lead indicators suggest that NAND demand particularly in servers has considerably weakened since August. Also, Kioxia warned that the recent US restrictions on <a href="https://www.smartkarma.com/entities/huawei-technologies-co-ltd" target="_blank" data-smartkarma-citation="entities:8231:1" rel="noopener">Huawei Technology (40978Z CH)</a> may have an impact on the business. For more details, we direct readers to the panel discussion in <a href="https://www.smartkarma.com/insights/smartkarma-flash-webinar-kioxia-ipo-how-solid-is-it" target="_blank" data-smartkarma-citation="insights:43475" rel="noopener">Smartkarma Flash Webinar | Kioxia IPO: How Solid Is It?</a>.  <div class="content-highlight">As the memory business is infamously volatile, we value Kioxia on through-cycle earnings number. Our analysis suggests that Kioxia trades at a substantial premium to peers' through-cycle multiples at the IPO price range. Consequently, while the fundamentals are attractive, we would give the IPO a pass due to the rich valuation. </div>

Kioxia (6600 JP) is the world’s second-largest player in the NAND flash memory market. Kioxia was spun off from Toshiba Corp (6502 JP) and acquired by KK Pangea, a special purpose company formed by a consortium led by Bain Capital for JPY2 trillion ($18 billion). Kioxia announced a tentative price range of JPY2,800-3,500 a share, materially below the JPY3,960 indicative price announced in August. The shares will list on the Tokyo Stock Exchange on 6 October. In our initiation note, we stated that for investors willing to play the cycle, we think that Kioxia's fundamentals offer more positives than negatives. However, lead indicators suggest that NAND demand particularly in servers has considerably weakened since August. Also, Kioxia warned that the recent US restrictions on Huawei Technology (40978Z CH) may have an impact on the business. For more details, we direct readers to the panel discussion in Smartkarma Flash Webinar | Kioxia IPO: How Solid Is It?.  As the memory business is infamously volatile, we value Kioxia on through-cycle earnings number. Our analysis suggests that Kioxia trades at a substantial premium to peers' through-cycle multiples at the IPO price range. Consequently, while the fundamentals are attractive, we would give the IPO a pass due to the rich valuation. 

We had previously expressed scepticism about the targeted price (¥3,960) that Bain and Toshiba were aiming to partially exit their Kioxia stakes at. The company announced its initial price range yesterday bringing those expectations down markedly to ¥2,800-3,500. We compare these valuations with those of peers below.

We had previously expressed scepticism about the targeted price (¥3,960) that Bain and Toshiba were aiming to partially exit their Kioxia stakes at. The company announced its initial price range yesterday bringing those expectations down markedly to ¥2,800-3,500. We compare these valuations with those of peers below.

Kioxia – Is There Value at the New Pricing Range?

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

In my initial first piece on the <a href="https://www.smartkarma.com/entities/kioxia" target="_blank" data-smartkarma-citation="entities:29243:1" rel="noopener">Kioxia (6600 JP)</a> IPO on 28 August 2020 called <a href="https://www.smartkarma.com/insights/kioxia-ipo-the-flow-dynamics" target="_blank" data-smartkarma-citation="insights:42648" rel="noopener">Kioxia IPO - The Flow Dynamics</a> I talked about the nature of who was going to be buying (and who was going to be sold to).I also noted my initial reaction that the price might be too high at ¥3,960/share and an EV of close to ¥3.5trln.<blockquote>My initial reaction is that the price may be too high and it could be revised downward. Given the fact that 65% of the offering goes to international investors, who are more inclined to provide their pricing input in a negative way, I think it eminently possible that the offering could be priced lower. I would not be surprised to see an offering price 10-25% lower than the ¥3960 proffered.</blockquote><h3>A New IPO Price Range</h3>On Thursday 17 September it was reported that the Kioxia Holdings IPO Price Range would be set at ¥2800-3500/share making the new offering size top out at ¥334.3bn and the market cap at IPO price be ¥1.88trln - both top figures year-to-date in 2020. That is a drop of 11.6-29.3%, which is a bit more aggressive than I had expected. It means the immediate uplift to Toshiba is considerably smaller compared to their in-price. Since I wrote bearishly on <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> exactly a month ago in <a href="https://www.smartkarma.com/insights/toshiba-topix-inclusion-jack-be-nimble-jack-be-quick" target="_blank" data-smartkarma-citation="insights:42235" rel="noopener">Toshiba TOPIX Inclusion - Jack Be Nimble, Jack Be Quick...</a> the shares are down 13.9%, but only down about 3% since <a href="https://www.smartkarma.com/insights/toshiba-kioxia-ipo-impact-activist-positioning" target="_blank" data-smartkarma-citation="insights:42638" rel="noopener">Toshiba: Kioxia IPO Impact &amp; Activist Positioning</a> on 30 August.If the market reacts not badly to the news of a possibly sharply reduced Kioxia IPO price and the corollary that lower price means lower proceeds (now and in future on a mark-to-market basis) will reduce the payout to Toshiba shareholders in terms of buying back stock could have a negative effect on Toshiba shares. That is worth watching for. It might be worth buying to cover the short. A bit lower down it is worth going long again. More below the fold.

In my initial first piece on the Kioxia (6600 JP) IPO on 28 August 2020 called Kioxia IPO - The Flow Dynamics I talked about the nature of who was going to be buying (and who was going to be sold to).I also noted my initial reaction that the price might be too high at ¥3,960/share and an EV of close to ¥3.5trln.My initial reaction is that the price may be too high and it could be revised downward. Given the fact that 65% of the offering goes to international investors, who are more inclined to provide their pricing input in a negative way, I think it eminently possible that the offering could be priced lower. I would not be surprised to see an offering price 10-25% lower than the ¥3960 proffered.A New IPO Price RangeOn Thursday 17 September it was reported that the Kioxia Holdings IPO Price Range would be set at ¥2800-3500/share making the new offering size top out at ¥334.3bn and the market cap at IPO price be ¥1.88trln - both top figures year-to-date in 2020. That is a drop of 11.6-29.3%, which is a bit more aggressive than I had expected. It means the immediate uplift to Toshiba is considerably smaller compared to their in-price. Since I wrote bearishly on Toshiba Corp (6502 JP) exactly a month ago in Toshiba TOPIX Inclusion - Jack Be Nimble, Jack Be Quick... the shares are down 13.9%, but only down about 3% since Toshiba: Kioxia IPO Impact &amp; Activist Positioning on 30 August.If the market reacts not badly to the news of a possibly sharply reduced Kioxia IPO price and the corollary that lower price means lower proceeds (now and in future on a mark-to-market basis) will reduce the payout to Toshiba shareholders in terms of buying back stock could have a negative effect on Toshiba shares. That is worth watching for. It might be worth buying to cover the short. A bit lower down it is worth going long again. More below the fold. 

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/693/original/2020-09-14_09-50-37.png?1600044664" class="editor-image img-responsive" data-smartkarma-image-id="158693"></figure><div class="content-caption">Source for all charts &amp; tables except as stated: Japan Analytics</div>EQUITY-DRIVEN - Japan's aggregate Shareholders' Equity has appreciated by 45% since 2014 - an annual rate of 5.5% and has been one of the key achievements of the 'Abe era'. For the five years before 2012, Shareholders Equity was unchanged, buffeted by the 2008/9 financial crisis and the 3/11.  Although the equity market has responded well to the change in reserves, Japan's PBR has remained within a range of 1.05 to 1.38 over the last decade and is unchanged compared to 2010. In prior post-bubble 'lost' decades, the average PBR was 1.8 times. In other markets, the rise of intangible assets has called the use of Book/Price as a metric and the S&amp;P 500 PBR is now almost three times that of the Japan aggregate having bottomed at 1.78 in March 2009.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/694/original/File%202020-09-14%2010%2007%2037.jpeg?1600045681" class="editor-image img-responsive" data-smartkarma-image-id="158694"></figure><div class="content-caption">Source: multpl.com</div>BOOK VALUE PER SHARE - In this Insight, we shall look at Japan's larger-cap companies (current market value &gt;¥100 billion) through the 'lens' of book value per share. Our focus will be less on the 'winners' and 'losers' than on those companies that have seen the least change in 'BVPS' over the last seven years. Our share count excludes treasury shares which is to the benefit of companies such as <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (9432 JP)</a> which has seen a 20% reduction in Net Shares Outstanding, but only a 9% increase in Shareholders' Equity. A BVPS growth metric does, however, flatter serial issuers of equity with declining share prices, such as <a href="https://www.smartkarma.com/entities/sosei-group-corp" target="_blank" data-smartkarma-citation="entities:770:1" rel="noopener">Sosei (4565 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/696/original/2020-09-14_10-26-48.png?1600046818" class="editor-image img-responsive" data-smartkarma-image-id="158696"></figure>WINNERS - As many may ask and for the record, our 'winning' thirty companies contains many of Japan's best-performing businesses and 'priciest 'stocks, such as <a href="https://www.smartkarma.com/entities/monotaro-co-ltd" target="_blank" data-smartkarma-citation="entities:15441:1" rel="noopener">Monotaro (3064 JP)</a>, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 (2413 JP)</a>, <a href="https://www.smartkarma.com/entities/gmo-payment-gateway-inc" target="_blank" data-smartkarma-citation="entities:1492:1" rel="noopener">GMO Payment Gateway (3769 JP)</a>, and <a href="https://www.smartkarma.com/entities/kobe-bussan-co-ltd" target="_blank" data-smartkarma-citation="entities:4701:1" rel="noopener">Kobe Bussan (3038 JP)</a>. Some of the more surprising entries are <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/tokyo-electric-power-co-inc" target="_blank" data-smartkarma-citation="entities:15457:1" rel="noopener">Tokyo Electric Power (9501 JP)</a>.  As an equally-weighted portfolio, this group has outperformed by 30% over one year and by 11% over the last three months.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/697/original/2020-09-14_10-33-13.png?1600047204" class="editor-image img-responsive" data-smartkarma-image-id="158697"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/698/original/2020-09-14_10-33-41.png?1600047231" class="editor-image img-responsive" data-smartkarma-image-id="158698"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/701/original/2020-09-14_10-47-56.png?1600048087" class="editor-image img-responsive" data-smartkarma-image-id="158701"></figure>LOSERS - Our list of losers, who have collectively underperformed by 9% over one year, have many of Japan's weaker business models (shipping, oil &amp; gas, paper, copiers, gaming machines. The list also features some of the less-astute management 'teams' (<a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a>, <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan (7201 JP)</a>, <a href="https://www.smartkarma.com/entities/kirin-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:16977:1" rel="noopener">Kirin (2503 JP)</a>, <a href="https://www.smartkarma.com/entities/lixil-group-corp" target="_blank" data-smartkarma-citation="entities:454:1" rel="noopener">Lixil (5938 JP)</a>, and <a href="https://www.smartkarma.com/entities/aeon-co-ltd" target="_blank" data-smartkarma-citation="entities:3:1" rel="noopener">Aeon (8267 JP)</a>).  Also among the latter are two medical-related business - the now remained <a href="https://www.smartkarma.com/entities/h-u-group-holdings-inc" target="_blank" data-smartkarma-citation="entities:16580:1" rel="noopener">H.U. Group (4544 JP)</a> (formerly Miraca) and recent Bain PE target <a href="https://www.smartkarma.com/entities/nichii-gakkan-co" target="_blank" data-smartkarma-citation="entities:6790:1" rel="noopener">Nichii Gakkan (9792 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/706/original/2020-09-14_10-57-45.png?1600048692" class="editor-image img-responsive" data-smartkarma-image-id="158706"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/707/original/2020-09-14_10-59-22.png?1600048774" class="editor-image img-responsive" data-smartkarma-image-id="158707"></figure>In the DETAIL section below, we all review the large companies that have seen the least change in BVPS over the last seven years and those with the lowest BVPS volatility over the same period. Our lists contain quite a few surprises.

Source for all charts &amp; tables except as stated: Japan AnalyticsEQUITY-DRIVEN - Japan's aggregate Shareholders' Equity has appreciated by 45% since 2014 - an annual rate of 5.5% and has been one of the key achievements of the 'Abe era'. For the five years before 2012, Shareholders Equity was unchanged, buffeted by the 2008/9 financial crisis and the 3/11.  Although the equity market has responded well to the change in reserves, Japan's PBR has remained within a range of 1.05 to 1.38 over the last decade and is unchanged compared to 2010. In prior post-bubble 'lost' decades, the average PBR was 1.8 times. In other markets, the rise of intangible assets has called the use of Book/Price as a metric and the S&amp;P 500 PBR is now almost three times that of the Japan aggregate having bottomed at 1.78 in March 2009.Source: multpl.comBOOK VALUE PER SHARE - In this Insight, we shall look at Japan's larger-cap companies (current market value &gt;¥100 billion) through the 'lens' of book value per share. Our focus will be less on the 'winners' and 'losers' than on those companies that have seen the least change in 'BVPS' over the last seven years. Our share count excludes treasury shares which is to the benefit of companies such as NTT (9432 JP) which has seen a 20% reduction in Net Shares Outstanding, but only a 9% increase in Shareholders' Equity. A BVPS growth metric does, however, flatter serial issuers of equity with declining share prices, such as Sosei (4565 JP).WINNERS - As many may ask and for the record, our 'winning' thirty companies contains many of Japan's best-performing businesses and 'priciest 'stocks, such as Monotaro (3064 JP), M3 (2413 JP), GMO Payment Gateway (3769 JP), and Kobe Bussan (3038 JP). Some of the more surprising entries are mixi (2121 JP) and Tokyo Electric Power (9501 JP).  As an equally-weighted portfolio, this group has outperformed by 30% over one year and by 11% over the last three months.LOSERS - Our list of losers, who have collectively underperformed by 9% over one year, have many of Japan's weaker business models (shipping, oil &amp; gas, paper, copiers, gaming machines. The list also features some of the less-astute management 'teams' (Toshiba (6502 JP), Nissan (7201 JP), Kirin (2503 JP), Lixil (5938 JP), and Aeon (8267 JP)).  Also among the latter are two medical-related business - the now remained H.U. Group (4544 JP) (formerly Miraca) and recent Bain PE target Nichii Gakkan (9792 JP).In the DETAIL section below, we all review the large companies that have seen the least change in BVPS over the last seven years and those with the lowest BVPS volatility over the same period. Our lists contain quite a few surprises.

🇯🇵 Japan • Every Shareholder Left Behind - The Book Value Per Share Metric

Japan

Toshiba Corporation manufactures and markets electrical and electronic products. The Company's products include digital products such as PCs and televisions, NAND flash memories, and system LSIs (large-scale integrated), as well as social infrastructures such as power generators, medical equipment, and home appliances.

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Toshiba Corp (6502 JP)

Toshiba – Kioxia’s Postponed IPO Is NOT About US-China Tensions and That Means More Downside Risk

The Nikkei reported today that Kioxia would be postponing its much-anticipated IPO due to US-China tensions. That is an interesting fig-leaf in our...

Mio Kato

Kioxia IPO: Valuation Insights

Kioxia (6600 JP) is the world’s second-largest player in the NAND flash memory market. TMC was spun off from Toshiba Corp (6502 JP) and acquired by...

Arun George

Kioxia – Is There Value at the New Pricing Range?

We had previously expressed scepticism about the targeted price (¥3,960) that Bain and Toshiba were aiming to partially exit their Kioxia stakes...

Mio Kato

Toshiba Is A Range Trade. Still.

In my initial first piece on the $Kioxia My initial reaction is that the price may be too high and it could be revised downward. Given the fact...

Travis Lundy

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52-week Range

Market Cap (USDm)

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Toshiba – Kioxia’s Postponed IPO Is NOT About US-China Tensions and That Means More Downside Risk

The Nikkei reported today that Kioxia would be postponing its much-anticipated IPO due to US-China tensions. That is an interesting fig-leaf in our...

Mio Kato

Kioxia IPO: Valuation Insights

Kioxia (6600 JP) is the world’s second-largest player in the NAND flash memory market. TMC was spun off from Toshiba Corp (6502 JP) and acquired by...

Arun George

Kioxia – Is There Value at the New Pricing Range?

We had previously expressed scepticism about the targeted price (¥3,960) that Bain and Toshiba were aiming to partially exit their Kioxia stakes...

Mio Kato

Toshiba Is A Range Trade. Still.

In my initial first piece on the $Kioxia My initial reaction is that the price may be too high and it could be revised downward. Given the fact...

Travis Lundy

🇯🇵 Japan • Every Shareholder Left Behind - The Book Value Per Share Metric

EQUITY-DRIVEN - Japans

Campbell Gunn