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.

Thematic (Sector/Industry)

<h3>What’s Original?</h3>
<p>In this original, we have discussed some of the key aspects highlighted in Kishida’s policy statements along with the current status of these policies and companies that are likely to benefit.</p>

What’s Original?
In this original, we have discussed some of the key aspects highlighted in Kishida’s policy statements along with the current status of these policies and companies that are likely to benefit.

Kishida as Prime Minister: The Path Ahead

<p><a href="https://asia.nikkei.com/Business/Energy/Japan-taps-Australia-and-Brunei-for-hydrogen-import-goal" target="_blank" rel="noopener">Momentum is building within East Asia to propel the Hydrogen economy forward</a> as Japan, Korea and China have demonstrated interest in investing heavily in the technology, a call that is being answered by a variety of players through the supply chain. We examine below the key investment opportunities and timelines for these players.</p>

Momentum is building within East Asia to propel the Hydrogen economy forward as Japan, Korea and China have demonstrated interest in investing heavily in the technology, a call that is being answered by a variety of players through the supply chain. We examine below the key investment opportunities and timelines for these players.

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Event-Driven

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/033/original/2020-09-15_10-23-17.png?1600133037" class="editor-image img-responsive" data-smartkarma-image-id="159033"></figure><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div><p><strong>THE BUFFETT TRADE</strong> - Much has already written on <a href="https://www.smartkarma.com/entities/berkshire-hathaway-inc-cl-b" target="_blank" data-smartkarma-citation="entities:8635:1" rel="noopener">Berkshire Hathaway</a>'s purchase of stakes in Japan's sogo shosha, including on this <a href="https://www.smartkarma.com/insights/a-quick-look-at-the-buffet-trade-and-the-most-obvious-follow-ons" target="_blank" data-smartkarma-citation="insights:43125" rel="noopener">platform</a>. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.</p><p>In this<strong> DETAIL</strong> section, we examine: -</p><ul>
<li>the macro 'logic' driving these investments,</li>
<li>a more appropriate analytical and valuation methodology for these companies</li>
<li>the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. </li>
</ul><div class="content-highlight"><p><strong>We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan's trading houses are one of the world's better deep value trades.</strong></p></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/053/original/2020-09-15_13-42-01.png?1600144936" class="editor-image img-responsive" data-smartkarma-image-id="159053"></figure>

Source for all charts &amp; tables: Japan AnalyticsTHE BUFFETT TRADE - Much has already written on Berkshire Hathaway's purchase of stakes in Japan's sogo shosha, including on this platform. The Japanese trading houses have a long and proud tradition and continue to attract the best talent from at home and abroad. In many respects, they have similarities with BH given their long-term approach to investing and focus on free cash flow generation. The differences are as striking, particularly the exposure to commodities and Asia, and the implications for both BH and Japan are profound.In this DETAIL section, we examine: -
the macro 'logic' driving these investments,
a more appropriate analytical and valuation methodology for these companies
the historically most-correlated peer groups and companies from both a technical and fundamental perspective if this trade were to be applied more broadly to the Japanese market. 
We can summarise our approach to understanding the rationale behind the Buffett trade in the chart below. The sogo shosha are, in aggregate, significant generators of Residual Comprehensive Income, particularly relative to their current market valuations. Priced at a historically low 0.93x book, Japan's trading houses are one of the world's better deep value trades.

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

<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><p><strong>EQUITY-DRIVEN</strong> - 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.</p><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><p><strong>BOOK VALUE PER SHARE </strong>- 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>.</p><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><p><strong>WINNERS</strong> - 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.</p><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><p><strong>LOSERS</strong> - 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>.</p><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><p>In the <strong>DETAIL</strong> 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.</p>

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

<p>Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the Japanese market overall offers value investors rich pickings relative to valuations that had been getting more stretched by the day in other regions, especially the US. Below, we provide a quick synopsis of the trading companies’ business models and our thoughts on other potential investments that could attract Berkshire.</p>

Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the Japanese market overall offers value investors rich pickings relative to valuations that had been getting more stretched by the day in other regions, especially the US. Below, we provide a quick synopsis of the trading companies’ business models and our thoughts on other potential investments that could attract Berkshire.

A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons

Japan

Sumitomo Corp is a general trading company.  The Company imports and exports a wide variety of goods such as metals, machinery, chemicals, fuel,food products, and textiles.  Sumitomo also operates real estate, construction, shipping, insurance, finance, and leasing businesses.

TOYOTA TSUSHO CORPORATION, a member of the Toyota Group, is a trading company. The Company markets automobiles, trucks, steel products, industrial machinery, chemical products, and energy in both domestic and overseas markets.  Toyota Tsusho primarily exports Toyota cars to Southeast Asia, China, the Middle East, and Latin America.

MonotaRO Co., Ltd. mainly sells machine tools, engine parts, and factory consumable goods on the web site.

Sojitz Corporation is a general trading company.  The Company has business divisions such as Machinery & Aerospace, Energy & Mineral Resources, Chemicals & Plastics, Real Estate Development & Forest Products, Consumer Lifestyle Business, and New Business Development Group.  Sojitz was formed through the business integration between Nichimen and Nissho Iwai.

MISUMI Group Inc. distributes precision machinery parts by mail order. The products include a variety of components such as press die, plastic mold, automated machinery, pc & network, and wiring.  The Company also sells supplies for factories, hospitals, and restaurants and semi-conductors by mail order.

IWATANI CORPORATION is a trading company supplying gases for industrial and household use.  The Company also handles fuel, consumer products, industrial materials, minerals, construction, agriculture, and medical products.  Iwatani produces liquid hydrogen with Mitsubishi Heavy Industries.

NAGASE & COMPANY, LTD. is a trading firm specializing in chemical products such as dyestuff, synthetic resins and rubber, and inorganic and organic chemicals.  The Company also handles electronics such as semiconductor manufacturing equipment and liquid crystal display (LCD) materials, as well as health care products such as cosmetics and medical equipment.

HANWA CO., LTD. wholesales, imports, and exports steel products, nonferrous metals, industrial machines, and food products.  The Company also handles chemical products, construction materials, and information equipment.  Hanwa has several subsidiaries and sales bases in the U.S. and around Asia.

INABA DENKI SANGYO CO., LTD. sells electric cables, plumbing products, and electronic equipment.  The Company's products include cables, electric switchboards, lighting equipment, sensors, and ducts.  Inaba Denki Sangyo also provides real estate management and data processing services.

KANEMATSU CORPORATION is a trading company handling textiles, fuel, chemicals, steel and housing construction materials, foodstuffs, and electronic equipment. The Company diversifies by operating a semiconductor-related IT (Information Technology) business.

Adani Enterprises Limited is an international trading house that operates from offices in India as well as other countries. The Company is involved in coal mining, cargo handling and power generation.  Adani also trades in a large number of products including textiles, energy, metals and agricultural products.

Reece Limited operates as a plumbing, building and hardware merchant throughout Australia.  The Company offers a variety of bathroom, kitchen and laundry products through its national stores and showrooms.  Reece's products are utilized by plumbers, consumers, architects, builders and interior designers.

United Rentals, Inc., through its subsidiary, is an equipment rental company operating a network of locations in the United States and Canada.  The Company serves the construction industry, industrial and commercial concerns, homeowners, and other individuals.

Fastenal Company sell industrial and construction supplies in a wholesale and retail fashion.  The Company markets its products and services throughout the United States, Canada, Mexico, Puerto Rico, Singapore, China, and The Netherlands.

Watsco, Inc. distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.  The Company operates various locations in the United States, with primary markets in the Sunbelt.

W.W. Grainger, Inc. distributes maintenance, repair and operating supplies, and related information to the commercial, industrial, contractor, and institutional markets in North America.  The Company's products include motors, HVAC equipment, lighting, hand and power tools, pumps, and electrical equipment.

Ashtead Group Plc is an international equipment rental company servicing customers nationwide in the US and the UK. The Company rents construction and industrial equipment. Ashtead generates approximately 85% of its revenue in the US through its subsidiary, Sunbelt Rentals with 388 locations across the US. The Group's UK business, A-Plant, has 106 locations nationwide.

Bunzl plc is a distribution group supplying a range of non-food consumable products for customers to operate their businesses but which they do not actually sell. The Company partners with both suppliers and customers in providing outsourcing solutions and service oriented distribution. Bunzl's main customer markets include grocery, foodservice, cleaning and safety.

Indutrade AB provides engineering and equipment, flow technology, industrial components, and special products.  The Company sells its products to industrial companies primarily in Northern Europe.

AerCap Holdings NV is the world's largest aircraft leasing firm by fleet value, and is listed on the New York Stock Exchange (AER). It has its headquarters in Dublin with offices in Amsterdam, Los Angeles, Shannon, Fort Lauderdale, Singapore, Shanghai, Abu Dhabi, Seattle and Toulouse.

Marubeni Corporation is a trading company with business divisions in iron & steel, information technology, utility & infrastructure, energy, food, metals & mineral resources, development & construction, and chemicals.  The Company markets its products globally through a network of sales offices and representative firms.

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Marubeni Corp (8002 JP)

Kishida as Prime Minister: The Path Ahead

In this original, we have discussed some of the key aspects highlighted in Kishida’s policy statements along with the current status of these...

Mio Kato

Asia’s Hydrogen Economy

China's increasing favour towards hydrogen is starting to generate investor interest in potential hydrogen economy and FCV plays. We examine...

Mio Kato

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

THE BUFFETT TRADE - Much has written on $ber

Campbell Gunn

A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons

Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the...

Mio Kato

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Kishida as Prime Minister: The Path Ahead

In this original, we have discussed some of the key aspects highlighted in Kishida’s policy statements along with the current status of these...

Mio Kato

Asia’s Hydrogen Economy

China's increasing favour towards hydrogen is starting to generate investor interest in potential hydrogen economy and FCV plays. We examine...

Mio Kato

🇯🇵 JAPAN • Analysing The "Buffett Trade", Valuing the Sogo Shosha & The Return of Asian Inflation

THE BUFFETT TRADE - Much has written on $ber

Campbell Gunn

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

EQUITY-DRIVEN - Japans

Campbell Gunn

A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons

Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the...

Mio Kato