'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Thematic (Sector/Industry)

<div>
<figure class="editor-figure mceNonEditable"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/147/271/original/2020-07-22_07-23-37.png?1595370233" class="editor-image img-responsive" data-smartkarma-image-id="147271"></figure><p><img src="https://static-prod.smartkarma.com/images/media/000/147/268/original/2020-07-22_06-41-57.png?1595367748" class="editor-image img-responsive" data-smartkarma-image-id="147268"></p></figure><div class="content-caption">Source • Japan Analytics</div>
<p><strong><a href="https://www.smartkarma.com/entities/disco-corp" target="_blank" data-smartkarma-citation="entities:15817:1" rel="noopener">DISCO 'DANCES</a>'</strong> - DISCO 'led' yesterday's results &amp; revision highlighting this part of the technology 'chain's' COVID immunity.  Rolling TTM revenues and operating profits have turned positive year-on-year for the first time in at least six quarters. Further, the initial half-year forecast (not shown above) implies this upward momentum has continued into the current quarter. Disco shares have, however, lagged its larger peers over the last twelve, six, three months and should now close some of the performance 'gap'. The SPE Peer Group is, however, the most Overbought in the market and valuations are 'full' which will temper the upside. We would not be short. For more detail, please see <a href="https://www.smartkarma.com/profiles/scott-foster" target="_blank" data-smartkarma-citation="accounts:1134" rel="noopener">Scott Foster</a>'s April Insight - <a href="https://www.smartkarma.com/insights/disco-6146-jp-preliminary-sales-report-encouraging-back-to-the-office-in-wuhan" target="_blank" data-smartkarma-citation="insights:38350" rel="noopener">Disco (6146 JP): Preliminary Sales Report Encouraging, Back to the Office in Wuhan</a>. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/147/269/original/File%202020-07-22%206%2056%2012.jpeg?1595368629" class="editor-image img-responsive" data-smartkarma-image-id="147269"></figure><figure class="editor-figure mceNonEditable"></figure><div class="content-caption">Source • Japan Analytics</div>
<p style="text-align: center;"><strong>DAILY STATS</strong></p>
</div><hr><div><p style="text-align: center;"><strong>8 Quarterly Results</strong></p></div><div><ul>
<li>
<strong>Results Score:</strong> 3 Positive / 3 Neutral / 2 Negative</li>
<li>
<strong>Average Results Score Change: </strong>-0.6</li>
<li>
<strong>Average % Change in Revenue:</strong> -3.6% Quarter YoY / -0.2% Rolling TTM YoY</li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -0.2ppt</li>
<li>
<strong>Percentage Making Quarterly Losses:</strong> 25%</li>
</ul></div><hr><div><p style="text-align: center;"><br><strong>6 Annual • 9 Interim Forecasts/Revisions</strong></p></div><div><ul>
<li>Annual Forecast/Revision Score: 2 Positive / 0 Neutral / 4 Negative</li>
<li>Interim Forecast/Revision Score Change: 3 Positive / 0 Neutral / 6 Negative</li>
<li>Average Forecast/Revision Score Change: -9.2</li>
</ul></div>


Source • Japan Analytics
DISCO 'DANCES' - DISCO 'led' yesterday's results &amp; revision highlighting this part of the technology 'chain's' COVID immunity.  Rolling TTM revenues and operating profits have turned positive year-on-year for the first time in at least six quarters. Further, the initial half-year forecast (not shown above) implies this upward momentum has continued into the current quarter. Disco shares have, however, lagged its larger peers over the last twelve, six, three months and should now close some of the performance 'gap'. The SPE Peer Group is, however, the most Overbought in the market and valuations are 'full' which will temper the upside. We would not be short. For more detail, please see Scott Foster's April Insight - Disco (6146 JP): Preliminary Sales Report Encouraging, Back to the Office in Wuhan. 
Source • Japan Analytics
DAILY STATS
8 Quarterly Results

Results Score: 3 Positive / 3 Neutral / 2 Negative

Average Results Score Change: -0.6

Average % Change in Revenue: -3.6% Quarter YoY / -0.2% Rolling TTM YoY

Average Operating Profit Margin Change: -0.2ppt

Percentage Making Quarterly Losses: 25%
 6 Annual • 9 Interim Forecasts/Revisions
Annual Forecast/Revision Score: 2 Positive / 0 Neutral / 4 Negative
Interim Forecast/Revision Score Change: 3 Positive / 0 Neutral / 6 Negative
Average Forecast/Revision Score Change: -9.2


🇯🇵 JAPAN • Results & Revisions 21st July - Disco Dances & The Nagamori Premium

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


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


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

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

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


Source • Japan Analytics

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

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

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

Equity Bottom-Up

<p>Disco's relative performance has remained strong, which we regard as appropriate for the world's dominant supplier of silicon wafer dicing saws, grinders, polishers, and related consumables. </p><p>Preliminary parent company sales data for 4Q of FY Mar-20 suggest that full-year consolidated results should meet or exceed guidance. Audited consolidated results are scheduled to be announced on  April 23.</p><p>Management reports that equipment to be shipped in April and May is being produced on schedule. Since a state of emergency has so far not been declared in Hiroshima or Nagano prefectures, where Disco's factories are located, operations have not been disrupted. </p><p>In addition, the company's shipping service suppliers continue their operations both in Japan and overseas. There should, therefore, be no significant impact on deliveries this month or next.</p><p>Telecommuting was discontinued and normal operations resumed in Wuhan on April 7. All of the company's sales and maintenance offices in China are now functioning normally.</p><p>Having rebounded by 35% over the past month, the shares are more than half way back to their ¥27,990 January high. At 35x management's EPS guidance for FY Mar-20 and 23x cyclical peak EPS recorded in FY Mar-18, they once again look like an investment in long-term economic recovery.</p>

Disco's relative performance has remained strong, which we regard as appropriate for the world's dominant supplier of silicon wafer dicing saws, grinders, polishers, and related consumables. Preliminary parent company sales data for 4Q of FY Mar-20 suggest that full-year consolidated results should meet or exceed guidance. Audited consolidated results are scheduled to be announced on  April 23.Management reports that equipment to be shipped in April and May is being produced on schedule. Since a state of emergency has so far not been declared in Hiroshima or Nagano prefectures, where Disco's factories are located, operations have not been disrupted. In addition, the company's shipping service suppliers continue their operations both in Japan and overseas. There should, therefore, be no significant impact on deliveries this month or next.Telecommuting was discontinued and normal operations resumed in Wuhan on April 7. All of the company's sales and maintenance offices in China are now functioning normally.Having rebounded by 35% over the past month, the shares are more than half way back to their ¥27,990 January high. At 35x management's EPS guidance for FY Mar-20 and 23x cyclical peak EPS recorded in FY Mar-18, they once again look like an investment in long-term economic recovery.

Disco (6146 JP): Preliminary Sales Report Encouraging, Back to the Office in Wuhan

<p>Japanese makers of semiconductor equipment have recently told us that (1) their customers continue to order new equipment and have not yet reduced their capital spending plans, but that (2) installations have been delayed or prevented due to restrictions introduced in response to COVID-19.  This is not sustainable.</p><p>The situation appears to be easing somewhat in China, but as worsening economic conditions undercut demand for electronic devices around the world, it may not matter.</p><p>Screen Holdings - the top maker of cleaning equipment for the semiconductor industry and coater/developers for the flat panel display industry - reduced FY Mar-20 guidance at the end of January, cutting their operating profit estimate by nearly half due to lower than expected capacity utilization and an unfavorable sales mix. Now they are talking about the unavoidable impact of deteriorating economic conditions.</p><p>Screen's share price has dropped by 57% since January to 20x management's new EPS guidance for FY Mar-20. But the company is likely to drop back into the red this quarter and, in our estimation, lose money in FY Mar-21 as a whole. As economists increasingly talk about depression, not recession, downside risk remains.</p><p>The company plans to announce FY Mar-20 results and guidance for FY Mar-21 on May 12. </p>

Japanese makers of semiconductor equipment have recently told us that (1) their customers continue to order new equipment and have not yet reduced their capital spending plans, but that (2) installations have been delayed or prevented due to restrictions introduced in response to COVID-19.  This is not sustainable.The situation appears to be easing somewhat in China, but as worsening economic conditions undercut demand for electronic devices around the world, it may not matter.Screen Holdings - the top maker of cleaning equipment for the semiconductor industry and coater/developers for the flat panel display industry - reduced FY Mar-20 guidance at the end of January, cutting their operating profit estimate by nearly half due to lower than expected capacity utilization and an unfavorable sales mix. Now they are talking about the unavoidable impact of deteriorating economic conditions.Screen's share price has dropped by 57% since January to 20x management's new EPS guidance for FY Mar-20. But the company is likely to drop back into the red this quarter and, in our estimation, lose money in FY Mar-21 as a whole. As economists increasingly talk about depression, not recession, downside risk remains.The company plans to announce FY Mar-20 results and guidance for FY Mar-21 on May 12. 

Screen Holdings (7735 JP): Additional Downside Risk as the Economy Weakens

ja research

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

<div><p style="text-align: center;"><strong>• RELATIVE PRICE SCORE •</strong></p></div><div><p><strong>RELATIVE PRICE SCORE OUTLIERS </strong>- The <strong>Relative Price Score</strong> (<strong>RPS</strong>) is a measure of price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices over the last 28 years and 24 months, respectively. As all companies are put on a comparable scale, '<strong>Overbought'</strong> and '<strong>Oversold</strong>' outliers and short-term changes in scoring can offer interesting trading opportunities.</p></div><p>The data for all 3,871 currently-listed Companies is cap-weight-aggregated into <strong>Relative Price Scores</strong> for our 328 <strong>Peer Groups</strong> and 30 <strong>Sectors.</strong> The Overbought and Oversold outlier 'thresholds are set' at <strong>+4</strong> &amp; <strong>-2</strong> for Companies, <strong>+3</strong> &amp; <strong>-1.5</strong> for Peer Groups and <strong>+2</strong> and <strong>-1</strong> for Sectors, respectively. These thresholds equate with the top and bottom percentiles of over one million historical observations.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/120/245/original/2020-02-27_08-50-00.png?1582762915" class="editor-image img-responsive" data-smartkarma-image-id="120245"></figure><div class="content-caption">Source • Japan Analytics</div><p>With a few exceptions, mean reversion from these extreme outlying states occurs typically in weeks or months. The twenty-eight-year history of Sector Relative Price Scores illustrates the ebbs and flows of investment themes in the market, from the 2000 <strong>Technology</strong> 'bubble' to the <strong>REIT</strong> and<strong> Real Estate</strong> peak of 2013/14, the <strong>Healthcare</strong> and <strong>FB&amp;T</strong> market of 2016/17. On the downside, there is greater 'persistence' in the Oversold zone, particularly recently for <strong>Energy</strong>, <strong>Banks</strong> and <strong>Utilities</strong> Sectors.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/120/400/original/2020-02-28_07-33-54.png?1582842856" class="editor-image img-responsive" data-smartkarma-image-id="120400"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/120/402/original/2020-02-28_07-34-58.png?1582842919" class="editor-image img-responsive" data-smartkarma-image-id="120402"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CONSUMER SERVICES</strong> - The most recent case of Sector mean reversion is in <strong>Consumer Services</strong>, driven primarily by the performance of <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a>, a business that is now seeing a direct impact from Covid-19 with the closure of Tokyo Disneyland until March 15th announced today. This news is prompting some short-covering in the Friday afternoon session; however, at 31X EV/OP, there is still 63% downside to a residual income-based no-growth valuation. We expect both the Sector's and company's RPS to retrace the gains of the last two years.  </p><div><p>In the<strong> DETAIL</strong> section below, we provide an update on  Sector and Peer Group trends, over the last three months and adds some stock-specific comments. A separate Insight to follow in the next few days will cover the Relative Price Scores for individual companies.</p></div>

• RELATIVE PRICE SCORE •RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance relative to TOPIX calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices over the last 28 years and 24 months, respectively. As all companies are put on a comparable scale, 'Overbought' and 'Oversold' outliers and short-term changes in scoring can offer interesting trading opportunities.The data for all 3,871 currently-listed Companies is cap-weight-aggregated into Relative Price Scores for our 328 Peer Groups and 30 Sectors. The Overbought and Oversold outlier 'thresholds are set' at +4 &amp; -2 for Companies, +3 &amp; -1.5 for Peer Groups and +2 and -1 for Sectors, respectively. These thresholds equate with the top and bottom percentiles of over one million historical observations.Source • Japan AnalyticsWith a few exceptions, mean reversion from these extreme outlying states occurs typically in weeks or months. The twenty-eight-year history of Sector Relative Price Scores illustrates the ebbs and flows of investment themes in the market, from the 2000 Technology 'bubble' to the REIT and Real Estate peak of 2013/14, the Healthcare and FB&amp;T market of 2016/17. On the downside, there is greater 'persistence' in the Oversold zone, particularly recently for Energy, Banks and Utilities Sectors.Source • Japan AnalyticsCONSUMER SERVICES - The most recent case of Sector mean reversion is in Consumer Services, driven primarily by the performance of Oriental Land (4661 JP), a business that is now seeing a direct impact from Covid-19 with the closure of Tokyo Disneyland until March 15th announced today. This news is prompting some short-covering in the Friday afternoon session; however, at 31X EV/OP, there is still 63% downside to a residual income-based no-growth valuation. We expect both the Sector's and company's RPS to retrace the gains of the last two years.  In the DETAIL section below, we provide an update on  Sector and Peer Group trends, over the last three months and adds some stock-specific comments. A separate Insight to follow in the next few days will cover the Relative Price Scores for individual companies.

🇯🇵 JAPAN • March Sector & Peer Group Relative Price Scores -

Japan

DISCO CORPORATION manufactures abrasive and precision industrial machinery for cutting and grinding purposes.  The Company's products are applied in the semiconductor, electronics, and construction industries to produce consumer goods such as personal computers, digital cameras, video game systems, and Digital Video Disc (DVD) players.

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DISCO Corp (6146 JP)

🇯🇵 JAPAN • Results & Revisions 21st July - Disco Dances & The Nagamori Premium

DISCO 'DANCES' - DISCO 'led' yesterday's results & revision highlighting this part of the technology 'chain's' COVID immunity. Rolling TTM...

Campbell Gunn

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

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

Campbell Gunn

Disco (6146 JP): Preliminary Sales Report Encouraging, Back to the Office in Wuhan

Disco's relative performance has remained strong, which we regard as appropriate for the world's dominant supplier of silicon wafer dicing saws,...

Scott Foster

Screen Holdings (7735 JP): Additional Downside Risk as the Economy Weakens

Japanese makers of semiconductor equipment have recently told us that (1) their customers continue to order new equipment and have not yet reduced...

Scott Foster

🇯🇵 JAPAN • March Sector & Peer Group Relative Price Scores -

• RELATIVE PRICE SCORE •RELATIVE PRICE SCORE OUTLIERS - The Relative Price Score (RPS) is a measure of price performance relative to TOPIX...

Campbell Gunn

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