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.

Equity Bottom-Up

The <a href="https://asia.nikkei.com/Business/Nissan-s-Ghosn-crisis/Nissan-to-slash-global-production-by-15" target="_blank">Nikkei reported</a> this morning that <a href="https://www.smartkarma.com/entities/72" target="_blank" data-smartkarma-citation="entities:72:1">Nissan Motor (7201 JP)</a> will cut global production by 15% for the coming FY03/20. Domestic production will remain at about 900k units but overseas production will drop 20% to 3.7m units.This appears to be the next step in a comprehensive overhaul of the company that the post-Ghosn management is pushing through. The article notes that sales incentives in the US will be cut while in China, the currently struggling market for smaller sedans will be deemphasised.The concern is the dividend, however, as the last time Nissan cut production so drastically, it was the financial crisis and the dividend was cut entirely. We do not expect such a serious result this time around but with Nissan looking like it has fully shifted towards a stance of strengthening its core operations we believe funds will be rerouted from shareholder returns to investment in the short-term.

The Nikkei reported this morning that Nissan Motor (7201 JP) will cut global production by 15% for the coming FY03/20. Domestic production will remain at about 900k units but overseas production will drop 20% to 3.7m units.This appears to be the next step in a comprehensive overhaul of the company that the post-Ghosn management is pushing through. The article notes that sales incentives in the US will be cut while in China, the currently struggling market for smaller sedans will be deemphasised.The concern is the dividend, however, as the last time Nissan cut production so drastically, it was the financial crisis and the dividend was cut entirely. We do not expect such a serious result this time around but with Nissan looking like it has fully shifted towards a stance of strengthening its core operations we believe funds will be rerouted from shareholder returns to investment in the short-term.

Nissan: Production Cut May Presage Dividend Cut Opening Up Downside

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

March 2019 had one less selling day than March 2018, and 5 more selling days than February 2019.  Hence, while auto unit sales fell by 5.1% YoY in March, in seasonally adjusted terms March SAAR hit 28.4m units (+30.5% MoM, -0.4% YoY), so from a SAAR perspective the YoY drop in March was not as bad as what media headlines have suggested (see <a href="https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html" target="_blank">https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html</a>, for instance).  According our observations March SAAR represented a significant move towards recovery to normal 1Q selling rate levels, but the SAAR weakness in January and February has led to 1Q19 average SAAR coming in at 25.0m units.  This 1Q run rate of 25.0m units, however, represents a 10.6% YoY demand contraction from 27.9m unit industry demand in 2018.1Q19 EV sales reached 191k units, double the 90k units achieved in 1Q18. However, the vast majority of China's EV sales are still in the A-C segments, with NIO's ES8 sales in the premium EV segments, for instance, amounting to just 3,989 units (just slightly above company guidance of 3.5-3.9k units).Overall retail inventory situation improved on a sequential basis, with CADA's Vehicle Inventory Alert Index falling to 55.3% in March from 63.6% in February, which was expected given the strong selling rate in March.  However, VIA Index readings above 50% still represents CADA's warning line on retail inventory.  While the government has talked about introducing policy measures to boost demand recently (see <a href="https://www.smartkarma.com/profiles/780" target="_blank" data-smartkarma-citation="accounts:780">Victoria Li</a> , <a href="https://www.smartkarma.com/insights/china-auto-new-incentives-bring-new-demand" target="_blank" data-smartkarma-citation="insights:29102">China Auto: New Incentives Bring New Demand</a> ), no concrete measures were introduced in March that could have positively affected demand.  At this point, however, given the magnitude of 1Q19's SAAR weakness we believe any stimulus introduced by the government will likely achieve something close to flat YoY demand growth at best in 2019. We believe that purely from a product exposure standpoint it is the compact mass segment EV OEMs that stand to benefit the most in the growth of China's EV market, but any equity valuation merits must stem from factors other than current operating fundamentals of EVs given their high costs.  As with Tesla, valuation merits of EV makers can only be argued from a capital raising/distant future profitability angle without regard for current company fundamentals, and for this the equity markets must see continued inflow in our view. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/048/original/Screen%20Shot%202019-04-15%20at%207.03.13%20PM.png?1555384986" class="editor-image img-responsive" data-smartkarma-image-id="85048"></figure><div class="content-caption">Source: CEIC, Author's Estimates using known seasonal factors</div>

March 2019 had one less selling day than March 2018, and 5 more selling days than February 2019.  Hence, while auto unit sales fell by 5.1% YoY in March, in seasonally adjusted terms March SAAR hit 28.4m units (+30.5% MoM, -0.4% YoY), so from a SAAR perspective the YoY drop in March was not as bad as what media headlines have suggested (see https://www.nytimes.com/aponline/2019/04/12/world/asia/ap-as-china-auto-sales.html, for instance).  According our observations March SAAR represented a significant move towards recovery to normal 1Q selling rate levels, but the SAAR weakness in January and February has led to 1Q19 average SAAR coming in at 25.0m units.  This 1Q run rate of 25.0m units, however, represents a 10.6% YoY demand contraction from 27.9m unit industry demand in 2018.1Q19 EV sales reached 191k units, double the 90k units achieved in 1Q18. However, the vast majority of China's EV sales are still in the A-C segments, with NIO's ES8 sales in the premium EV segments, for instance, amounting to just 3,989 units (just slightly above company guidance of 3.5-3.9k units).Overall retail inventory situation improved on a sequential basis, with CADA's Vehicle Inventory Alert Index falling to 55.3% in March from 63.6% in February, which was expected given the strong selling rate in March.  However, VIA Index readings above 50% still represents CADA's warning line on retail inventory.  While the government has talked about introducing policy measures to boost demand recently (see Victoria Li , China Auto: New Incentives Bring New Demand ), no concrete measures were introduced in March that could have positively affected demand.  At this point, however, given the magnitude of 1Q19's SAAR weakness we believe any stimulus introduced by the government will likely achieve something close to flat YoY demand growth at best in 2019. We believe that purely from a product exposure standpoint it is the compact mass segment EV OEMs that stand to benefit the most in the growth of China's EV market, but any equity valuation merits must stem from factors other than current operating fundamentals of EVs given their high costs.  As with Tesla, valuation merits of EV makers can only be argued from a capital raising/distant future profitability angle without regard for current company fundamentals, and for this the equity markets must see continued inflow in our view. Source: CEIC, Author's Estimates using known seasonal factors

A Few Thoughts on China's March Auto Demand: SAAR Was Not as Bad as What News Headlines Suggested

Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

This Insight is following our visit to <a href="https://www.smartkarma.com/entities/11809" target="_blank" data-smartkarma-citation="entities:11809:1">Aisin Seiki (7259 JP)</a> last month. Our focus in the meeting was to mainly cover our key areas of concern, which include the company’s significant decline in OP during 3Q (Aisin Takes a 50% Cut in OP This Quarter; A Downward Revision in FY03/19E Target), its business performance in China and the US, and its stance on the competitive landscape having noted a significant takeover this year (<a href="https://www.smartkarma.com/insights/wabco-confirms-being-a-takeover-target-of-the-private-german-auto-parts-maker-zf" target="_blank" data-smartkarma-citation="insights:28324">WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF</a>). Although our meeting with the company was a relatively short one this time, we did leave the company strongly convinced about our long-held initial view on the company.

This Insight is following our visit to Aisin Seiki (7259 JP) last month. Our focus in the meeting was to mainly cover our key areas of concern, which include the company’s significant decline in OP during 3Q (Aisin Takes a 50% Cut in OP This Quarter; A Downward Revision in FY03/19E Target), its business performance in China and the US, and its stance on the competitive landscape having noted a significant takeover this year (WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF). Although our meeting with the company was a relatively short one this time, we did leave the company strongly convinced about our long-held initial view on the company.

Key Takeaways from Our Visit to Aisin Seiki

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.

Event-Driven

<a href="https://www.smartkarma.com/entities/430" target="_blank" data-smartkarma-citation="entities:430:1">Uber Technologies (0084207D US)</a> as kicked off its IPO by posting its S-1 filing last Thursday. <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>, through the SoftBank Vision Fund, is Uber’s single largest shareholder with a 16.3% stake. SoftBank has invested around $7.7 billion to acquire its current Uber stake at an effective price of $34.49 per share. <div class="content-highlight">SoftBank stands to make 70-130% of its total investment if Uber achieves its rumoured IPO valuation range of $90-120 billion. It is unclear if the gains will be returned to shareholders or recycled for future big bets. Overall, we believe that SoftBank is a big winner in Uber’s IPO from both on an ROI and credibility perspective.</div>

Uber Technologies (0084207D US) as kicked off its IPO by posting its S-1 filing last Thursday. Softbank Group (9984 JP), through the SoftBank Vision Fund, is Uber’s single largest shareholder with a 16.3% stake. SoftBank has invested around $7.7 billion to acquire its current Uber stake at an effective price of $34.49 per share. SoftBank stands to make 70-130% of its total investment if Uber achieves its rumoured IPO valuation range of $90-120 billion. It is unclear if the gains will be returned to shareholders or recycled for future big bets. Overall, we believe that SoftBank is a big winner in Uber’s IPO from both on an ROI and credibility perspective.

SoftBank Group: Uber IPO a Welcome Shot in the Arm

Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Accelerating Tomorrow’s Independent Research

Boost Research

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<ul>
<li>Transportation industries Kodak Moment embracing Hybrids, modest near-term EV growth</li>
<li>Widespread adoption of Hydrogen considered unlikely</li>
<li>41% of Platinum &amp; 84% of Palladium reliant on autocatalyst demand</li>
<li>Hybrids in Europe up 107% in three years at 1:7 to diesel counterparts, without subsidies</li>
<li>Hybrid premium ~ 8% like-for-like over a combustion vehicle </li>
<li>Carpooling/ride-share platforms have hallmarks of being a macro-trend</li>
<li>W. Asian carpool CAGR of 77.6% over past 11 years</li>
<li>Est. by close 2019 &gt;62m people globally will utilise trans. platforms, forgoing car ownership
</li>
<li>Adverse impact on vehicle growth, models, drive-trains, R&amp;D, insurance &amp; finance </li>
<li>Logistics industry diesel transitioning will affect LT PGM demand, in particular platinum</li>
<li>Primary platinum-surplus to grow in time, downward pressure on price</li>
</ul>
Auto-catalysts make up the majority of platinums (41%) and in particular, palladium (84%) end use demand.  To determine the future demand profile for PGMs, therefore, we examined the types and likelihood of future drivetrains, as well as technologies affecting unit demand.
Hydrogen's key attraction is its potential green credentials, and if it was to ever became a reality, resultant PGM catalyst demand would outstrip all existing suppliers.  To achieve that noble aim, however, gargantuan energy resources would be needed to conduct electrolysis of water, thermodynamically, a very energy intensive process.  Our analysis concludes that hydrogen will remain a boutique industry, confined to economies with abundant hydrocarbon production, with conversion relying on steam reformation.  Overall impact of hydrogen on PGM demand, will be marginal at best.
Presently, EVs have substantial range and recharge hurdles to overcome before they could ever be a primary mode of transport for many; with global demand primarily driven by Chinese directives, not by the Western consumer.  In the short to medium-term, we do not expect EVs to impact PGM demand significantly.  However, we preface that statement by our belief that in the longer-term, the largest adopter of EVs will be within the commercial logistics sector, currently dominated by diesel power plants, which rely on a substantial amount of platinum within its auto-catalysts.  Widespread adoption of EVs and robotic drones and the replacement of traditional diesel drivetrains will only exacerbate current over-supply in platinum, in time, we forecast its price to fall substantially.
Hybrid sales are up 107% in Europe over the past three years without any state subsidies.  It is reasonable to assume that potential demand of PGMs have, and will continue to be, stymied by hybrid advances.  But we expect overall (even modest) growth in car volume sales should maintain current market dynamics, in the short to medium term.
Carpooling and a host of other transactional transport options are now a realistic, flexible and affordable life-style choice, that contradict the necessity of car ownership.  Especially among the inner-city urbanites, with Asia averaging a CAGR of 77.6% over the past decade.  Car manufacturers are already experiencing significant sales headwinds.  On average it has been found that members/fleet ratio (i.e. No. of cars divided by No. of members) range between 61 – 76, a fraction of unit demand when compared with an average Western family of three or four members, often owning two vehicles.  Using decade average regional CAGRs, projecting three years in advance, the potential number of decreased car sales globally could reach 62m by the close of 2019.  To put that into context, Volkswagen and Toyota produce between 10 to 11m  units each pa.  This raises the question of whether recent sluggish global car sales is somehow related to the almost exponential growth in carpooling/ride-share platforms?


Transportation industries Kodak Moment embracing Hybrids, modest near-term EV growth
Widespread adoption of Hydrogen considered unlikely
41% of Platinum &amp; 84% of Palladium reliant on autocatalyst demand
Hybrids in Europe up 107% in three years at 1:7 to diesel counterparts, without subsidies
Hybrid premium ~ 8% like-for-like over a combustion vehicle 
Carpooling/ride-share platforms have hallmarks of being a macro-trend
W. Asian carpool CAGR of 77.6% over past 11 years
Est. by close 2019 &gt;62m people globally will utilise trans. platforms, forgoing car ownership

Adverse impact on vehicle growth, models, drive-trains, R&amp;D, insurance &amp; finance 
Logistics industry diesel transitioning will affect LT PGM demand, in particular platinum
Primary platinum-surplus to grow in time, downward pressure on price

Auto-catalysts make up the majority of platinums (41%) and in particular, palladium (84%) end use demand.  To determine the future demand profile for PGMs, therefore, we examined the types and likelihood of future drivetrains, as well as technologies affecting unit demand.
Hydrogen's key attraction is its potential green credentials, and if it was to ever became a reality, resultant PGM catalyst demand would outstrip all existing suppliers.  To achieve that noble aim, however, gargantuan energy resources would be needed to conduct electrolysis of water, thermodynamically, a very energy intensive process.  Our analysis concludes that hydrogen will remain a boutique industry, confined to economies with abundant hydrocarbon production, with conversion relying on steam reformation.  Overall impact of hydrogen on PGM demand, will be marginal at best.
Presently, EVs have substantial range and recharge hurdles to overcome before they could ever be a primary mode of transport for many; with global demand primarily driven by Chinese directives, not by the Western consumer.  In the short to medium-term, we do not expect EVs to impact PGM demand significantly.  However, we preface that statement by our belief that in the longer-term, the largest adopter of EVs will be within the commercial logistics sector, currently dominated by diesel power plants, which rely on a substantial amount of platinum within its auto-catalysts.  Widespread adoption of EVs and robotic drones and the replacement of traditional diesel drivetrains will only exacerbate current over-supply in platinum, in time, we forecast its price to fall substantially.
Hybrid sales are up 107% in Europe over the past three years without any state subsidies.  It is reasonable to assume that potential demand of PGMs have, and will continue to be, stymied by hybrid advances.  But we expect overall (even modest) growth in car volume sales should maintain current market dynamics, in the short to medium term.
Carpooling and a host of other transactional transport options are now a realistic, flexible and affordable life-style choice, that contradict the necessity of car ownership.  Especially among the inner-city urbanites, with Asia averaging a CAGR of 77.6% over the past decade.  Car manufacturers are already experiencing significant sales headwinds.  On average it has been found that members/fleet ratio (i.e. No. of cars divided by No. of members) range between 61 – 76, a fraction of unit demand when compared with an average Western family of three or four members, often owning two vehicles.  Using decade average regional CAGRs, projecting three years in advance, the potential number of decreased car sales globally could reach 62m by the close of 2019.  To put that into context, Volkswagen and Toyota produce between 10 to 11m  units each pa.  This raises the question of whether recent sluggish global car sales is somehow related to the almost exponential growth in carpooling/ride-share platforms?

PGMs: Facing Technological Obsolescence? (P. 2)

Japan

Toyota Motor Corporation manufactures, sells, leases, and repairs passenger cars, trucks, buses, and their related parts worldwide. The Company also operates financing services through their subsidiaries. Toyota Motor builds homes, produces pleasure boats, and develops intelligent transportation systems including radar cruise control and electronic toll collection systems.

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Toyota Motor (7203 JP)

Nissan: Production Cut May Presage Dividend Cut Opening Up Downside

The Nikkei reported this morning that Nissan Motor (7201 JP) will cut global production by 15% for the coming FY03/20. Domestic production will...

Mio Kato

A Few Thoughts on China's March Auto Demand: SAAR Was Not as Bad as What News Headlines Suggested

March 2019 had one less selling day than March 2018, and 5 more selling days than February 2019. Hence, while auto unit sales fell by 5.1% YoY in...

Henry Kwon

Key Takeaways from Our Visit to Aisin Seiki

This Insight is following our visit to Aisin Seiki (7259 JP) last month. Our focus in the meeting was to mainly cover our key areas of concern,...

Aqila Ali

SoftBank Group: Uber IPO a Welcome Shot in the Arm

Uber Technologies (0084207D US) as kicked off its IPO by posting its S-1 filing last Thursday. Softbank Group (9984 JP), through the SoftBank...

Arun George

PGMs: Facing Technological Obsolescence? (P. 2)

Transportation industries Kodak Moment embracing Hybrids, modest near-term EV growth Widespread adoption of Hydrogen considered unlikely 41% of...

Boost Research

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