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

Chiyoda’s 1Q was relatively quiet as gross margins recovered and cost control was strong. All attention will remain on the timing of the FID from Qatar which has been pushed back from 1HFY03/21 to 2H FY03/21 but still faces uncertainty given that clients appear to be waiting for more clarity on the length of COVID’s impact before going ahead with projects.

Chiyoda’s 1Q was relatively quiet as gross margins recovered and cost control was strong. All attention will remain on the timing of the FID from Qatar which has been pushed back from 1HFY03/21 to 2H FY03/21 but still faces uncertainty given that clients appear to be waiting for more clarity on the length of COVID’s impact before going ahead with projects.

Chiyoda – Earnings Structure Improves but Qatar Delayed

Nikola Corporation Executive Chairman Trevor Milton has been doing the rounds with social media interviews and recently spoke to noted Tesla sceptic, @TeslaCharts on his podcast. The discussion covered some interesting topics such as grid balancing and other methods to reduce hydrogen costs and Nikola’s unique business concept. In light of the 59% drop in the stock price in just over a month, we examine these topics below.

Nikola Corporation Executive Chairman Trevor Milton has been doing the rounds with social media interviews and recently spoke to noted Tesla sceptic, @TeslaCharts on his podcast. The discussion covered some interesting topics such as grid balancing and other methods to reduce hydrogen costs and Nikola’s unique business concept. In light of the 59% drop in the stock price in just over a month, we examine these topics below.

Nikola – Grid Balancing, Hydrogen and Vertical Integration

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/139/997/original/2020-06-15_11-08-56.png?1592186965" class="editor-image img-responsive" data-smartkarma-image-id="139997"></figure><div class="content-caption">Source: Japan Analytics</div>
STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. <a href="https://www.smartkarma.com/insights/japan-stress-tests-part-1-altman-z-scores" target="_blank" data-smartkarma-citation="insights:40180" rel="noopener">Part 1</a> looked at the time-worn Altman-Z Score for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the 'lifeblood' of all businesses - Operating Cash Flow.
ACCRUAL ACCOUNTING - Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, "Accrual accounting brings the future forward in time and anticipates future cash flows."  Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)'s</a> Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company's Relative Price Score over the last thirty years. Further Insights in this series will continue to 'mine'  the Cash Flow statement by exploring Financing Cash Flows and the Working Capital Cycle.
REFORMULATED CASH FLOWSTATEMENTS - Our Operating Cash Flow calculation is derived from each company's Balance Sheet and Income Statement for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into Operating Cash Flow and Investing Cash Flow, which includes Fixed Asset and Inventory Cash Flows.  Cash flows relating to financing activities are divided into Financing Cash Flow and Shareholder Cash Flow. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of Other Comprehensive Income which are added to or subtracted from Shareholders' Equity. 
</div>UNIVERSE - The universe for this Insight comprises the 614 Japanese companies with a market capitalisation excluding Treasury Stock over ¥100 million and for which we have at least two years of cash flow data.  Five non-financial companies, which have significant financial subsidiaries (<a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a>, <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> and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>), have been excluded from this analysis.


Source: Japan Analytics
STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. Part 1 looked at the time-worn Altman-Z Score for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the 'lifeblood' of all businesses - Operating Cash Flow.
ACCRUAL ACCOUNTING - Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, "Accrual accounting brings the future forward in time and anticipates future cash flows."  Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. Nissan Motor (7201 JP)'s Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company's Relative Price Score over the last thirty years. Further Insights in this series will continue to 'mine'  the Cash Flow statement by exploring Financing Cash Flows and the Working Capital Cycle.
REFORMULATED CASH FLOWSTATEMENTS - Our Operating Cash Flow calculation is derived from each company's Balance Sheet and Income Statement for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into Operating Cash Flow and Investing Cash Flow, which includes Fixed Asset and Inventory Cash Flows.  Cash flows relating to financing activities are divided into Financing Cash Flow and Shareholder Cash Flow. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of Other Comprehensive Income which are added to or subtracted from Shareholders' Equity. 
UNIVERSE - The universe for this Insight comprises the 614 Japanese companies with a market capitalisation excluding Treasury Stock over ¥100 million and for which we have at least two years of cash flow data.  Five non-financial companies, which have significant financial subsidiaries (Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)), have been excluded from this analysis. 

🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow & Accruals

We spoke to Chiyoda this morning to get more detail on the impact of COVID lockdowns on the various projects that the company is managing across the world. The impact was exceedingly limited till the end of the March quarter but there are some risks to be aware of.

We spoke to Chiyoda this morning to get more detail on the impact of COVID lockdowns on the various projects that the company is managing across the world. The impact was exceedingly limited till the end of the March quarter but there are some risks to be aware of.

Chiyoda – Direct COVID Impact Limited but Order Flow Recovery Waits on Crude Prices

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/350/original/2020-05-10_07-41-07.png?1589064097" class="editor-image img-responsive" data-smartkarma-image-id="132350"></figure><div class="content-caption">Source • Japan Analytics</div>HERD IMMUNITY - The market 'herd' continues to be immune to the siren song of earnings announcements. In last week's two reporting days, aggregate trailing operating income declined by ¥400 billion, while the current year forecast was trimmed by ¥800 billion. The respective numbers for net income were ¥600 billion and ¥200 billion - the latter being flattering in its 'deception' as the figure includes three net-income 'heavy' sogo-shosha. We expect a PER 'breakout' to above 18x in the coming week.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/351/original/2020-05-10_08-08-43.png?1589065754" class="editor-image img-responsive" data-smartkarma-image-id="132351"></figure><div class="content-caption">Source • Japan Analytics</div>INTERIM LEADING THE WAY - Our Results and Revisions scoring methodology tracks both Interim and Annual forecasts with the former signalling the direction of the latter. For some companies such as <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl (4921 JP)</a>, <a href="https://www.smartkarma.com/entities/jcu-corp" target="_blank" data-smartkarma-citation="entities:16229:1" rel="noopener">JCU (4975 JP)</a> and <a href="https://www.smartkarma.com/entities/zenkoku-hosho-co-ltd" target="_blank" data-smartkarma-citation="entities:5537:1" rel="noopener">Zenkoku Hosho (7164 JP)</a>, the Interim forecast is sufficiently pessimistic as to taint the reliability of the annual forecast. Our Interim Score will reach a new ten-year low this week; the Annual Score did so last month. We do not expect the COVID-19 earnings cycle to bottom until the January/February's mostly third-quarter results announcements.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/366/original/2020-05-10_09-01-50.png?1589068924" class="editor-image img-responsive" data-smartkarma-image-id="132366"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/367/original/2020-05-10_09-00-50.png?1589068939" class="editor-image img-responsive" data-smartkarma-image-id="132367"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div>In the DETAIL below, we shall review the results, revisions and initial forecast announcements made by larger-cap (¥75b+) companies on Friday. The balance between positive/neutral/negative of the 211 results announcements was 90:27:107. The average change in Score was -1. For the 131 revisions/initial forecasts, the split was 43:4:84  and the average Score was -5. Of the 155 companies declaring full-year results, 49% made interim and annual forecasts for the current year. Two hundred thirty-three companies will announce on Monday, the largest of which by market capitalisation will be <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a>, <a href="https://www.smartkarma.com/entities/mitsubishi-electric-corp" target="_blank" data-smartkarma-citation="entities:11171:1" rel="noopener">Mitsubishi Electric (6503 JP)</a>, and <a href="https://www.smartkarma.com/entities/bridgestone-corp" target="_blank" data-smartkarma-citation="entities:8914:1" rel="noopener">Bridgestone (5108 JP)</a>. Friday's 'best' and worst scoring results were from <a href="https://www.smartkarma.com/entities/chiyoda-corp" target="_blank" data-smartkarma-citation="entities:6232:1" rel="noopener">Chiyoda (6366 JP)</a> and <a href="https://www.smartkarma.com/entities/keihan-electric-railway-co" target="_blank" data-smartkarma-citation="entities:6120:1" rel="noopener">Keihan Electric Railway (9045 JP)</a>, although the former is below our cap cut-off for our tables below. For more, see <a href="https://www.smartkarma.com/profiles/mio-kato-cfa" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a>'s results update <a href="https://www.smartkarma.com/insights/chiyoda-gross-margin-disappoints-but-sg-a-control-continues" target="_blank" data-smartkarma-citation="insights:39166" rel="noopener">Chiyoda – Gross Margin Disappoints but SG&amp;A Control Continues</a>.

Source • Japan AnalyticsHERD IMMUNITY - The market 'herd' continues to be immune to the siren song of earnings announcements. In last week's two reporting days, aggregate trailing operating income declined by ¥400 billion, while the current year forecast was trimmed by ¥800 billion. The respective numbers for net income were ¥600 billion and ¥200 billion - the latter being flattering in its 'deception' as the figure includes three net-income 'heavy' sogo-shosha. We expect a PER 'breakout' to above 18x in the coming week.Source • Japan AnalyticsINTERIM LEADING THE WAY - Our Results and Revisions scoring methodology tracks both Interim and Annual forecasts with the former signalling the direction of the latter. For some companies such as Fancl (4921 JP), JCU (4975 JP) and Zenkoku Hosho (7164 JP), the Interim forecast is sufficiently pessimistic as to taint the reliability of the annual forecast. Our Interim Score will reach a new ten-year low this week; the Annual Score did so last month. We do not expect the COVID-19 earnings cycle to bottom until the January/February's mostly third-quarter results announcements.Source • Japan AnalyticsIn the DETAIL below, we shall review the results, revisions and initial forecast announcements made by larger-cap (¥75b+) companies on Friday. The balance between positive/neutral/negative of the 211 results announcements was 90:27:107. The average change in Score was -1. For the 131 revisions/initial forecasts, the split was 43:4:84  and the average Score was -5. Of the 155 companies declaring full-year results, 49% made interim and annual forecasts for the current year. Two hundred thirty-three companies will announce on Monday, the largest of which by market capitalisation will be Softbank Corp (9434 JP), Mitsubishi Electric (6503 JP), and Bridgestone (5108 JP). Friday's 'best' and worst scoring results were from Chiyoda (6366 JP) and Keihan Electric Railway (9045 JP), although the former is below our cap cut-off for our tables below. For more, see Mio Kato's results update Chiyoda – Gross Margin Disappoints but SG&amp;A Control Continues. 

🇯🇵 JAPAN • Results & Revisions Update 8th May - Lion, PPI, Hoya, Sogo Shosha, NEC

Japan

NICHIREKI CO., LTD. produces and sells asphalt emulsions.  The Company provides road paving and water proofing work with asphalt emulsions.  Nichireki also wholesales landscaping materials.

TOKYU CONSTRUCTION CO., LTD. is established through the reorganization of Tokyu Construction.  The Company is a general contractor that builds commercial, institutional, and residential buildings.  Tokyu Construction also performs civil engineering works for dams, bridges, and transportation system. The Company is a member of Tokyu group.

TOA CORPORATION is a general contractor operating nationwide and overseas. The Company performs waterfront and land civil engineering works for harbor facilities.  Toa provides dredging, reclamation, and land improvement works. The Company also builds commercial, residential, and institutional buildings. Additionally, Toa operates real estate businesses.

CTI Engineering Co., Ltd. operates a construction consulting business mainly for public sector.  The Company provides consultation services mainly for rivers, dam, and road constructions.  CTI Engineering also conducts geological survey as well as researches and develops environment friendly technology for urban infrastructure.

Hibiya Engineering, Ltd. designs, installs, and maintains climate control, electrical, and sanitation facilities.  The Company also sells equipment related to the above.

MIYAJI ENGINEERING GROUP, INC. is a holding company established through the merger of Miyaji Iron Works and Miyaji Construction & Engineering. The Company, through its subsidiaries, designs, builds, inspects, and repairs various bridges, buildings, and sluice gates.  Miyaji also manufactures and sells steel frames.

MEISEI INDUSTRIAL Co., Ltd. performs thermal insulation works in liquefied natural gas (LNG) tanks and petrochemical plants.  The Company also provides corrosion protection works for stacks, ducts, and marine structures.  Meisei also performs acoustic insulation and fireproofing works.  The Company manufactures and sells industrial machinery and materials such as boilers.

The Nippon Road Co Ltd paves a variety of roads.  The Company also performs civil engineering works and constructs buildings.  Nippon Road manufactures and sells paving materials such as asphalt and concrete compounds.  The Company, affiliated with Shimizu Corp., operates real estate leasing business.  Nippon Road develops recycling systems for industrial waste.

YAHAGI CONSTRUCTION CO., LTD. builds commercial, institutional, and residential buildings.  The Company also performs civil engineering works for tunnels, railroads, and parks.  Additionally, Yahagi operates real estate businesses. The Company manufactures and sells building materials such as steel and concrete products.

Nippon Koei Co., Ltd. provides construction consulting and engineering services to the public and private sectors.  The Company operates in the hydroelectric, irrigation, and power transmission fields.  Nippon Koei also operates its own construction division.

Ramky Infrastructure Limited is an intergrated construction and infrastructure development and management company. The Company also offers services in waste management, design-build-own-operate projects, real estate,  infrastructure consultancy, finance and investment.

PT Petrosea Tbk provides engineering construction and contract mining services for the oil and gas, mining, and infrastructure industries. The Company also provides heavy equipment rentals throughout Indonesia for its clients.

China Haisum Engineering Co., Ltd. is a comprehensive engineering service company in China. The company provides engineering design, engineering consultant service, construction supervision and general contracting service.

Longjian Road & Bridge Co., Ltd. operates as a contractor for highway construction projects and highway maintenance. The Company is also a contractor for building bridges.

Kelington Group Berhad designs, fabricates and installs ultra-high purity gas and chemicals delivery systems.

Hongrun Construction Group Co., Ltd. undertakes engineering construction projects of infrastructure, business and residential buildings, waste water treatment plants and other projects mainly in China.

Hongrun Construction Group Co, Ltd. (002062 CH)

Inner Mongolia Hotision & Monsod Drought-Resistance Greening Co Ltd engages in ecological environment constructions. The Company's main services include engine ring design and construction, and seedlings cultivation.

Shenzhen Techand Ecology & Environment Company Limited is engaged in the construction of ecological environment projects.  The Company's main services are water conservation, ecological restoration, landscape construction and garden maintenance, etc.

Xinjiang Beixin Road & Bridge Group Co., Ltd. operates transportation construction businesses. The Company builds roads, bridges, tunnels, and other municipal traffic projects. Xinjiang Beixin Road & Bridge Group also conducts investment, financial leasing, building materials production, and logistics businesses.

Long Yuan Construction Group Co., Ltd. undertakes various construction projects such as civil buildings, industrial buildings, municipal buildings, public facilities, and building decorations.

CHIYODA CORPORATION constructs, inspects, and maintains industrial plants around the world.  Those plants include oil refinery, petrochemical, food, and pharmaceutical plants.  The Company also provides comprehensive engineering services for such as energy saving, factory automation (FA), and environmental preservation for water treatment and soil purification.

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Chiyoda Corp (6366 JP)

Chiyoda – Earnings Structure Improves but Qatar Delayed

Chiyoda’s 1Q was relatively quiet as gross margins recovered and cost control was strong. All attention will remain on the timing of the FID from...

Mio Kato

Nikola – Grid Balancing, Hydrogen and Vertical Integration

Nikola Corporation Executive Chairman Trevor Milton has been doing the rounds with social media interviews and recently spoke to noted Tesla...

Mio Kato

🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow & Accruals

STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated...

Campbell Gunn

Chiyoda – Direct COVID Impact Limited but Order Flow Recovery Waits on Crude Prices

We spoke to Chiyoda this morning to get more detail on the impact of COVID lockdowns on the various projects that the company is managing across...

Mio Kato

🇯🇵 JAPAN • Results & Revisions Update 8th May - Lion, PPI, Hoya, Sogo Shosha, NEC

HERD IMMUNITY - The market 'herd' continues to be immune to the siren song of earnings announcements. In last week's two reporting days, aggregate...

Campbell Gunn

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