Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<h3>The Idemitsu bid for Toa Oil looks bumpity. It is a weird situation though.</h3><p>In mid-December, <a href="https://www.smartkarma.com/entities/idemitsu-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:109:1" rel="noopener">Idemitsu Kosan (5019 JP)</a> - one of the two large refinery groups in Japan, formed from the merger of Idemitsu Kosan and Showa Shell Oil KK (the other large one being <a href="https://www.smartkarma.com/entities/eneos-holdings-inc" target="_blank" data-smartkarma-citation="entities:638:1" rel="noopener">ENEOS Holdings (5020 JP)</a> formed from JX and Tonen General) - announced a Tender Offer for the minority portion of <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a>.</p><p>Idemitsu had "inherited" the majority portion in the acquisition of Showa Shell a couple years ago, and had not wrapped it up yet. </p><p>Toa Oil has for years been considered a jewel of an asset because of its extraordinarily high Nelson Complexity Index among refineries in Japan. This allows the company to get more, and more interesting products, out of every barrel of oil put in, and it allows the use of very heavy oil which is less expensive. </p><p>Because the company gets 90% of its revenue acting as an outsourced refinery for Idemitsu's raw materials and output, it carries little inventory and earns a tolling spread, which normally would be negotiated on an arms' length basis. Given the replacement value of the asset, and the market value of the use of the asset, it would appear that the current agreement with the current level of income it affords Toa is not quite arms' length. That would be a good reason to object to the pricing of the deal. If the refinery asset were sold on the open market in an auction, it would likely fetch a higher price for shareholders, including Idemitsu. </p><p>The original deal and all its parameters was discussed in <a href="https://www.smartkarma.com/insights/idemitsu-launches-lowball-tender-offer-for-subsidiary-toa-oil-5008" target="_blank" data-smartkarma-citation="insights:46384" rel="noopener">Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)</a> and was updated in <a href="https://www.smartkarma.com/insights/toa-oil-5008-tender-offer-update-looks-bumpity" target="_blank" data-smartkarma-citation="insights:46996" rel="noopener">Toa Oil (5008) Tender Offer Update - Looks Bumpity.</a> </p><h2>The NEW News</h2><ul>
<li>On 20 January, Toa Oil announced the record date for the EGM to be 10 February.</li>
<li>Since I last wrote, the largest shareholder has gotten larger, adding 2% to its position as of 21 January (and reported 28 January) and they now hold 22.98%. </li>
<li>On Friday 29 January, Toa Oil reported its <a href="https://www.toaoil.co.jp/investor/pdf/settlement_report_202103_3.pdf" target="_blank" rel="noopener">Q3 earnings</a>.</li>
<li>Toa Oil also announced a revision to its <a href="https://www.toaoil.co.jp/investor/pdf/20210129_gyousekiyosou_shusei.pdf" target="_blank" rel="noopener">full-year forecasts</a>.  The revenue forecast was revised by +7.7%. OP was revised by +509.8%. Net Profit was revised by +418.9%. Those are very big numbers. </li>
<li>Based on that revision, Toa Oil had to revise its <a href="https://www.toaoil.co.jp/investor/pdf/20210129_ikenhyoumei_henkou_english.pdf" target="_blank" rel="noopener">Target Opinion Statement</a>.</li>
<li>And because Toa Oil revised its Target Opinion Statement, pursuant to Article 27-8 Para 8 of the Financial Instruments and Exchange Act, Idemitsu had to <a href="https://ssl4.eir-parts.net/doc/5019/ir_material9/153752/00.pdf" target="_blank" rel="noopener">extend the Tender Offer</a> so there were 10 business days between the announcement and the tender close. The old close was 2 February. The new close is 15 February. </li>
<li>I expect that means Toa Oil will amend the record date for the EGM because Toa and Idemitsu would not want the EGM record date to be before Idemitsu had secured the extra shares.</li>
</ul><p>The quantum of the net change in the revision in earnings forecast should merit a little complaint by shareholders. The <em>change</em> in net income this year alone vs forecast is 5.1% of the Tender Offer Price Market Cap. Even if there is no change to future earnings EVER, that is 5.1% more. </p><p>Given that the Tender Offer Price was the wrong price in the first place, I imagine shareholders who have seen the price trade above the Tender Offer Price every day since the shares were free to trade (on the first day after the announcement, the shares closed limit up but below the tender offer price), will be even less inclined to accept a low-ball price. </p><p>More discussion below.</p>

The Idemitsu bid for Toa Oil looks bumpity. It is a weird situation though.In mid-December, Idemitsu Kosan (5019 JP) - one of the two large refinery groups in Japan, formed from the merger of Idemitsu Kosan and Showa Shell Oil KK (the other large one being ENEOS Holdings (5020 JP) formed from JX and Tonen General) - announced a Tender Offer for the minority portion of Toa Oil Co Ltd (5008 JP).Idemitsu had "inherited" the majority portion in the acquisition of Showa Shell a couple years ago, and had not wrapped it up yet. Toa Oil has for years been considered a jewel of an asset because of its extraordinarily high Nelson Complexity Index among refineries in Japan. This allows the company to get more, and more interesting products, out of every barrel of oil put in, and it allows the use of very heavy oil which is less expensive. Because the company gets 90% of its revenue acting as an outsourced refinery for Idemitsu's raw materials and output, it carries little inventory and earns a tolling spread, which normally would be negotiated on an arms' length basis. Given the replacement value of the asset, and the market value of the use of the asset, it would appear that the current agreement with the current level of income it affords Toa is not quite arms' length. That would be a good reason to object to the pricing of the deal. If the refinery asset were sold on the open market in an auction, it would likely fetch a higher price for shareholders, including Idemitsu. The original deal and all its parameters was discussed in Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008) and was updated in Toa Oil (5008) Tender Offer Update - Looks Bumpity. The NEW News
On 20 January, Toa Oil announced the record date for the EGM to be 10 February.
Since I last wrote, the largest shareholder has gotten larger, adding 2% to its position as of 21 January (and reported 28 January) and they now hold 22.98%. 
On Friday 29 January, Toa Oil reported its Q3 earnings.
Toa Oil also announced a revision to its full-year forecasts.  The revenue forecast was revised by +7.7%. OP was revised by +509.8%. Net Profit was revised by +418.9%. Those are very big numbers. 
Based on that revision, Toa Oil had to revise its Target Opinion Statement.
And because Toa Oil revised its Target Opinion Statement, pursuant to Article 27-8 Para 8 of the Financial Instruments and Exchange Act, Idemitsu had to extend the Tender Offer so there were 10 business days between the announcement and the tender close. The old close was 2 February. The new close is 15 February. 
I expect that means Toa Oil will amend the record date for the EGM because Toa and Idemitsu would not want the EGM record date to be before Idemitsu had secured the extra shares.
The quantum of the net change in the revision in earnings forecast should merit a little complaint by shareholders. The change in net income this year alone vs forecast is 5.1% of the Tender Offer Price Market Cap. Even if there is no change to future earnings EVER, that is 5.1% more. Given that the Tender Offer Price was the wrong price in the first place, I imagine shareholders who have seen the price trade above the Tender Offer Price every day since the shares were free to trade (on the first day after the announcement, the shares closed limit up but below the tender offer price), will be even less inclined to accept a low-ball price. More discussion below.

Toa Oil (5008) Tender Offer Updated Update - STILL Looks Bumpity

<p>On 15 December, <a href="https://www.smartkarma.com/entities/idemitsu-kosan-co-ltd" target="_blank" data-smartkarma-citation="entities:109:1" rel="noopener">Idemitsu Kosan (5019 JP)</a> launched a Tender Offer for subsidiary <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a> at what was an extraordinarily opportunistic price - JPY 2450/share.</p><p>Some might call this price insultingly low.</p><p>It was apparently deemed "fair" because the non-arms' length contract signed with the parent (and Tender Offeror) provides for an exceptionally low ROA, and the next few years involves some shutdowns for longer-term maintenance, which will lower FCF. </p><p>This pricing process fairness problem was discussed in some detail in <a href="https://www.smartkarma.com/insights/idemitsu-launches-lowball-tender-offer-for-subsidiary-toa-oil-5008" target="_blank" data-smartkarma-citation="insights:46384" rel="noopener">Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)</a>. </p><p>There have been a few developments since the announcement.</p><ul><li>Just prior to the offer being made, large shareholder Cornwall Capital had been increasing their stake and coincidentally announced an increased stake of 18.22% on the same day as the announcement. Since the offer has been made, they have filed two more amendments to quantity to lift their stake to 20.83% as of 24 December (reported 4 January). As seen from the chart, the shares have not traded below terms since they first freely traded pre-announcement, and Cornwall increased their stake by 2.6+% from 15-Dec to 24-Dec 2020 at prices ABOVE terms.</li></ul><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/182/218/original/Screenshot+2021-01-13+at+12.28.45+PM.png?1610512414" class="editor-image img-responsive" data-smartkarma-image-id="182218"></figure></section><ul>
<li>Since the 25th of December, another 5% of shares out have traded at prices above terms. Nobody else has yet announced a 5+% position. </li>
<li>Around year-end, specialty "business-politics" magazine <em>Sentaku</em> published an article talking about the oil refining business in Japan, JXTG/ENEOS's leading place in it, the Idemitsu deal for Toa which was termed odd, <a href="https://www.smartkarma.com/entities/fuji-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:12970:1" rel="noopener">Fuji Oil Co Ltd (5017 JP)</a>, <a href="https://www.smartkarma.com/entities/cosmo-energy-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:26565:1" rel="noopener">Cosmo Energy Holdings (5021 JP)</a>, <em>and some speculation about what might be behind the Idemitsu deal for Toa. The conclusions of the article in that regard are striking. </em>
</li>
</ul><div class="content-highlight">
<p>In the meantime, after a single day limit up ending below terms which saw 20,400 shares trade, the next 1.46mm shares (11.8% of shares out) have all traded above terms.</p>
<p>If one adds the 20.8% held by Cornwall Capital (including the 2.6% purchased above terms since announcement) plus the 9.2% which have traded above terms <em>not</em> purchased by Cornwall, that gets one to 30.4%, which is reasonably close to a blocking stake. </p>
</div><p>Discussion continues below.</p>

On 15 December, Idemitsu Kosan (5019 JP) launched a Tender Offer for subsidiary Toa Oil Co Ltd (5008 JP) at what was an extraordinarily opportunistic price - JPY 2450/share.Some might call this price insultingly low.It was apparently deemed "fair" because the non-arms' length contract signed with the parent (and Tender Offeror) provides for an exceptionally low ROA, and the next few years involves some shutdowns for longer-term maintenance, which will lower FCF. This pricing process fairness problem was discussed in some detail in Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008). There have been a few developments since the announcement.Just prior to the offer being made, large shareholder Cornwall Capital had been increasing their stake and coincidentally announced an increased stake of 18.22% on the same day as the announcement. Since the offer has been made, they have filed two more amendments to quantity to lift their stake to 20.83% as of 24 December (reported 4 January). As seen from the chart, the shares have not traded below terms since they first freely traded pre-announcement, and Cornwall increased their stake by 2.6+% from 15-Dec to 24-Dec 2020 at prices ABOVE terms.
Since the 25th of December, another 5% of shares out have traded at prices above terms. Nobody else has yet announced a 5+% position. 
Around year-end, specialty "business-politics" magazine Sentaku published an article talking about the oil refining business in Japan, JXTG/ENEOS's leading place in it, the Idemitsu deal for Toa which was termed odd, Fuji Oil Co Ltd (5017 JP), Cosmo Energy Holdings (5021 JP), and some speculation about what might be behind the Idemitsu deal for Toa. The conclusions of the article in that regard are striking. 


In the meantime, after a single day limit up ending below terms which saw 20,400 shares trade, the next 1.46mm shares (11.8% of shares out) have all traded above terms.
If one adds the 20.8% held by Cornwall Capital (including the 2.6% purchased above terms since announcement) plus the 9.2% which have traded above terms not purchased by Cornwall, that gets one to 30.4%, which is reasonably close to a blocking stake. 
Discussion continues below.

Toa Oil (5008) Tender Offer Update - Looks Bumpity.

<p>When one looks upon the landscape of Japan's oil refineries - a delightful vista of 20th century industrialisation being left by the wayside in the move to EVs, solar power, "green" investment, etc, one small refinery stands out - the Keihin refinery of <a href="https://www.smartkarma.com/entities/toa-oil-co-ltd" target="_blank" data-smartkarma-citation="entities:11021:1" rel="noopener">Toa Oil Co Ltd (5008 JP)</a>. </p>
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</section>
<p>Toa Oil's Keihin Refinery has a Nelson Complexity Index higher than any other refinery in Japan to my knowledge (the Nelson Complexity Index provides a measure of the ability of a refinery to process inputs into lighter product. The lighter the end product, the higher the complexity score on that particular line/output (crude goes into an atmospheric distillation process and comes out as several products which are subsequently treated by hydro- or merox treaters, subject to secondary distillation, or gas processing, then subject to FCC feeds, cokers, hydrocracking, isomerization, reformer stages, etc). The complexity score of a refinery is the weighted average complexity of its output lines. Toa Oil is in the very high teens whereas most major refiners just get to double digits or slightly above.</p>
<p>Generically, a refinery's Nelson Complexity Index/Score is a measure of the value of the refinery - both in cost terms and in terms of value-add. </p>
<p>Toa Oil effectively sold itself to Showa Shell in 1979 then Showa Shell consolidated it in 2005 when activists were knocking on the door of cheap stocks and Toa placed shares with Showa Shell taking their ownership to 50.1%. Since then, Showa Shell (and now Idemitsu) has effectively used it as an outsourced capital asset. Huge sums were invested, and subsequently depreciated, and now the "book value" of the assets is effectively below 20% of the investment cost, and the book value of the refinery portion (not including the land or some of the financial assets related to the oil business in Japan (oil refining taxes stream through companies like this as both assets and liabilities because of the methodology applied)) is probably on the order of 10-15% of its replacement value. </p>
<p>But Showa Shell used it, and now Idemitsu uses it, as a rented asset. Toa sells 90% of its output to Idemitsu, and generates electricity with much of the rest, which it sells to TEPCO. The business with Idemitsu is just a tolling charge. Idemitsu supplies crude, uses the refinery for a fee, then takes the product. If spreads are good, Idemitsu benefits. If spreads are low, Idemitsu effectively has the low-cost producer on tap at a low price. How is that tolling charge set? It's not clear. The arithmetic doesn't add up to arms' length or market pricing. The board of Toa is a couple of inexpert independents, a former customer (who is described as independent), one or two internal people, and four people from Idemitsu and Showa Shell. It would be surprising if it were NOT Idemitsu determining for Toa how much Toa was going to charge. Toa could, of course, negotiate fiercely. The CEO (a former Idemitsu man) who gets paid by the board (full of Idemitsu people) to rent its asset to Idemitsu at a rate which is completely uneconomic long-term and ignores the value built up over the years by shareholders. </p>
<p><strong>Today, after years of speculation, Idemitsu announced that it would launch a Tender Offer for Toa Oil to take out the minorities.</strong> It comes at ¥2450/share which is a 23% premium to last, a slight premium to book, a discount to the land value under the refinery, and a tiny fraction of the replacement value of the asset, but the "fair value" assessed by the independent valuation agent based on numbers supplied by the Target Company based on its contract with the parent company shows that the price is not too far off "fair", as long as the contract with its parent is fair, and one ignores what the real world value is.</p>
<p>The Tender Offer starts today and goes for 30 days. </p>
<p>Because this was a clear situation of informational edge owned by the Acquiror, who controls the company and its board, in a highly technical industry, with highly-regulated processes and somewhat complex valuation methodologies, it would make total sense that the inexpert independent board members seek out expert help to value the complex asset in a complex business. Obviously, with the social demands of the Corporate Governance Code and last year's METI Fair M&amp;A Guidelines weighing heavily on the Toa directors, they would have ensured that they were extra careful to establish a fair process, including a market check, expert valuation, a majority of minority investor agreement, and separate advisors for the Special Committee. They would have gotten a fairness opinion.</p>
<p>Toa Oil minority shareholders, unfortunately, are left without any of that. </p>
<p>There is a large foreign shareholder who has been buying who, given their buying activity, and their long-term average purchase price, is unlikely to be ecstatic with this price. But to see this get a bump, it probably needs more people getting upset. </p>

When one looks upon the landscape of Japan's oil refineries - a delightful vista of 20th century industrialisation being left by the wayside in the move to EVs, solar power, "green" investment, etc, one small refinery stands out - the Keihin refinery of Toa Oil Co Ltd (5008 JP). 



Toa Oil's Keihin Refinery has a Nelson Complexity Index higher than any other refinery in Japan to my knowledge (the Nelson Complexity Index provides a measure of the ability of a refinery to process inputs into lighter product. The lighter the end product, the higher the complexity score on that particular line/output (crude goes into an atmospheric distillation process and comes out as several products which are subsequently treated by hydro- or merox treaters, subject to secondary distillation, or gas processing, then subject to FCC feeds, cokers, hydrocracking, isomerization, reformer stages, etc). The complexity score of a refinery is the weighted average complexity of its output lines. Toa Oil is in the very high teens whereas most major refiners just get to double digits or slightly above.
Generically, a refinery's Nelson Complexity Index/Score is a measure of the value of the refinery - both in cost terms and in terms of value-add. 
Toa Oil effectively sold itself to Showa Shell in 1979 then Showa Shell consolidated it in 2005 when activists were knocking on the door of cheap stocks and Toa placed shares with Showa Shell taking their ownership to 50.1%. Since then, Showa Shell (and now Idemitsu) has effectively used it as an outsourced capital asset. Huge sums were invested, and subsequently depreciated, and now the "book value" of the assets is effectively below 20% of the investment cost, and the book value of the refinery portion (not including the land or some of the financial assets related to the oil business in Japan (oil refining taxes stream through companies like this as both assets and liabilities because of the methodology applied)) is probably on the order of 10-15% of its replacement value. 
But Showa Shell used it, and now Idemitsu uses it, as a rented asset. Toa sells 90% of its output to Idemitsu, and generates electricity with much of the rest, which it sells to TEPCO. The business with Idemitsu is just a tolling charge. Idemitsu supplies crude, uses the refinery for a fee, then takes the product. If spreads are good, Idemitsu benefits. If spreads are low, Idemitsu effectively has the low-cost producer on tap at a low price. How is that tolling charge set? It's not clear. The arithmetic doesn't add up to arms' length or market pricing. The board of Toa is a couple of inexpert independents, a former customer (who is described as independent), one or two internal people, and four people from Idemitsu and Showa Shell. It would be surprising if it were NOT Idemitsu determining for Toa how much Toa was going to charge. Toa could, of course, negotiate fiercely. The CEO (a former Idemitsu man) who gets paid by the board (full of Idemitsu people) to rent its asset to Idemitsu at a rate which is completely uneconomic long-term and ignores the value built up over the years by shareholders. 
Today, after years of speculation, Idemitsu announced that it would launch a Tender Offer for Toa Oil to take out the minorities. It comes at ¥2450/share which is a 23% premium to last, a slight premium to book, a discount to the land value under the refinery, and a tiny fraction of the replacement value of the asset, but the "fair value" assessed by the independent valuation agent based on numbers supplied by the Target Company based on its contract with the parent company shows that the price is not too far off "fair", as long as the contract with its parent is fair, and one ignores what the real world value is.
The Tender Offer starts today and goes for 30 days. 
Because this was a clear situation of informational edge owned by the Acquiror, who controls the company and its board, in a highly technical industry, with highly-regulated processes and somewhat complex valuation methodologies, it would make total sense that the inexpert independent board members seek out expert help to value the complex asset in a complex business. Obviously, with the social demands of the Corporate Governance Code and last year's METI Fair M&amp;A Guidelines weighing heavily on the Toa directors, they would have ensured that they were extra careful to establish a fair process, including a market check, expert valuation, a majority of minority investor agreement, and separate advisors for the Special Committee. They would have gotten a fairness opinion.
Toa Oil minority shareholders, unfortunately, are left without any of that. 
There is a large foreign shareholder who has been buying who, given their buying activity, and their long-term average purchase price, is unlikely to be ecstatic with this price. But to see this get a bump, it probably needs more people getting upset. 

Idemitsu Launches Lowball Tender Offer for Subsidiary Toa Oil (5008)

'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><p style="text-align: center;"><strong>•BEST &amp; WORST 11th AUGUST •</strong></p></div><div>
<p>The 'best' of Tuesday's large-cap announcements came from <a href="https://www.smartkarma.com/entities/taiko-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11127:1" rel="noopener">Taiko Pharmaceutical (4574 JP)</a><a href="https://www.smartkarma.com/entities/yaoko-co-ltd" target="_blank" data-smartkarma-citation="entities:1419:1" rel="noopener">,</a> the worst from railway group <a href="https://www.smartkarma.com/entities/hankyu-hanshin-holdings-inc" target="_blank" data-smartkarma-citation="entities:13058:1" rel="noopener">Hankyu Hanshin (9042 JP)</a>.  More extensive coverage follows in the <strong>DETAIL</strong> section below.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/152/180/original/2020-08-13_05-28-00.png?1597264094" class="editor-image img-responsive" data-smartkarma-image-id="152180"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/152/181/original/2020-08-13_05-28-38.png?1597264139" class="editor-image img-responsive" data-smartkarma-image-id="152181"></figure><div class="content-caption">Source • Japan Analytics</div>
<hr>
<div><p style="text-align: center;"><strong>DAILY STATS</strong></p></div>
<hr>
<div><p><strong>(BACK TO WEAK) PERCENTAGES</strong> -<strong> 63%</strong> of quarterly results, <strong>61%</strong> of annual forecasts/revisions and<strong> 71%</strong> of interim forecasts have negative Scores and 30% of companies reporting lost money for the quarter.</p></div>
<hr>
<div><p style="text-align: center;"><strong>218 Quarterly Results</strong></p></div>
<div><ul>
<li>
<strong>Results Score:</strong> 28% Positive / 9% Neutral / 63% Negative</li>
<li>
<strong>Average Results Score Change:</strong> -3.8 points</li>
<li>
<strong>Average % Change in Revenue:</strong> -7.2% Quarter YoY / -0.0% Rolling TTM YoY </li>
<li>
<strong>Average Operating Profit Margin Change:</strong> +2.5 ppt</li>
<li>
<strong>Percentage Making Quarterly Losses:</strong> 30%</li>
</ul></div>
<hr>
<div><p style="text-align: center;"><strong>80 Annual • 35 Interim Forecasts/Revisions</strong></p></div>
<div><ul>
<li>
<strong>Annual Forecast/Revision Score:</strong> 29% Positive / 10% Neutral / 61% Negative</li>
<li>
<strong>Interim Forecast/Revision Score Change:</strong> 23% Positive / 6% Neutral / 71% Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -7.4 points</li>
</ul></div>
</div>

•BEST &amp; WORST 11th AUGUST •
The 'best' of Tuesday's large-cap announcements came from Taiko Pharmaceutical (4574 JP), the worst from railway group Hankyu Hanshin (9042 JP).  More extensive coverage follows in the DETAIL section below.
Source • Japan Analytics

DAILY STATS

(BACK TO WEAK) PERCENTAGES - 63% of quarterly results, 61% of annual forecasts/revisions and 71% of interim forecasts have negative Scores and 30% of companies reporting lost money for the quarter.

218 Quarterly Results


Results Score: 28% Positive / 9% Neutral / 63% Negative

Average Results Score Change: -3.8 points

Average % Change in Revenue: -7.2% Quarter YoY / -0.0% Rolling TTM YoY 

Average Operating Profit Margin Change: +2.5 ppt

Percentage Making Quarterly Losses: 30%


80 Annual • 35 Interim Forecasts/Revisions


Annual Forecast/Revision Score: 29% Positive / 10% Neutral / 61% Negative

Interim Forecast/Revision Score Change: 23% Positive / 6% Neutral / 71% Negative

Average Forecast/Revision Score Change: -7.4 points



🇯🇵 JAPAN • Results & Revisions 12th August - PPI, Toshiba, McDonald's, ENEOS

<p><strong>FROM OPERATING TO FINANCING CASH FLOWS</strong> -  Having examined Operating Cash Flow in our previous <a href="https://www.smartkarma.com/insights/japan-stress-tests-part-2-operating-cash-flow-accruals" target="_blank" data-smartkarma-citation="insights:40321" rel="noopener">Insight</a>, we shall look into the 'stressors' between Operating Cash Flow and Financing Cash Flow. In our reformulated Cash Flow Statements, cash flows relating to operating activities are divided into Operating Cash Flows and Investing Cash Flows, which comprise Fixed Asset and Inventory Cash Flows.  Free Cash Flow is the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow. Inventories are not included in Operating Cash Flow as they are considered discretionary, are often related to Fixed asset Cash Flows, and can be highly seasonal.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/225/original/2020-06-21_08-34-07.png?1592698079" class="editor-image img-responsive" data-smartkarma-image-id="141225"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>JAPAN WAS FCF POSITIVE IN Q4..</strong> - Despite the decline in Operating Cash Flow in the last quarter (the final quarter of the Fiscal Year for most Japanese companies), Investing Cash Flow was more positive than in any quarter since FY2016-Q4, which also coincided with the last business cycle low. As a result, the aggregate Free Cash Flow for the 3,639 listed non-financial companies (excluding<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>) was an impressive ¥8.4 trillion or an annualised yield of 6.4%.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/223/original/2020-06-21_08-51-12.png?1592697088" class="editor-image img-responsive" data-smartkarma-image-id="141223"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>..AS CAPEX WAS PUT ON HOLD</strong> - Seasonally Japanese companies capital expenditures are higher in the second half of the fiscal year- in FY2019, ¥21trillion was added to Operating Assets. In contrast, FY2020 saw a 79% decline in capex to ¥4.4 trillion, all of which was spent in the third quarter. This decline is the most substantial second-half quarter-on-quarter contraction in fixed asset outflows since 2009.   </p><p>In the <strong>DETAIL</strong> below, we shall highlight those 'outlier' large-cap companies which are either end of the capex, inventory and Free Cash Flow tables, and focus on those with the greatest intimations of business 'stress'. We have excluded the Real Estate Sector from this analysis due to the inherent volatility of fixed assets and inventory cash flows fo these companies.</p>

FROM OPERATING TO FINANCING CASH FLOWS -  Having examined Operating Cash Flow in our previous Insight, we shall look into the 'stressors' between Operating Cash Flow and Financing Cash Flow. In our reformulated Cash Flow Statements, cash flows relating to operating activities are divided into Operating Cash Flows and Investing Cash Flows, which comprise Fixed Asset and Inventory Cash Flows.  Free Cash Flow is the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow. Inventories are not included in Operating Cash Flow as they are considered discretionary, are often related to Fixed asset Cash Flows, and can be highly seasonal.Source: Japan AnalyticsJAPAN WAS FCF POSITIVE IN Q4.. - Despite the decline in Operating Cash Flow in the last quarter (the final quarter of the Fiscal Year for most Japanese companies), Investing Cash Flow was more positive than in any quarter since FY2016-Q4, which also coincided with the last business cycle low. As a result, the aggregate Free Cash Flow for the 3,639 listed non-financial companies (excluding Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)) was an impressive ¥8.4 trillion or an annualised yield of 6.4%.Source: Japan Analytics..AS CAPEX WAS PUT ON HOLD - Seasonally Japanese companies capital expenditures are higher in the second half of the fiscal year- in FY2019, ¥21trillion was added to Operating Assets. In contrast, FY2020 saw a 79% decline in capex to ¥4.4 trillion, all of which was spent in the third quarter. This decline is the most substantial second-half quarter-on-quarter contraction in fixed asset outflows since 2009.   In the DETAIL below, we shall highlight those 'outlier' large-cap companies which are either end of the capex, inventory and Free Cash Flow tables, and focus on those with the greatest intimations of business 'stress'. We have excluded the Real Estate Sector from this analysis due to the inherent volatility of fixed assets and inventory cash flows fo these companies.

🇯🇵 JAPAN - Stress Tests Part 3 - Inventory, Fixed Asset & Free Cash Flows

Japan

INPEX CORPORATION is a holding company established through the reorganization of INPEX Corp and Teikoku Oil.  The Company manages subsidiaries that explores, produces, and sells oil and natural gas.

Idemitsu Kosan Co., Ltd. explores, imports, refines, and distributes petroleum and its related products.  The Company also manufactures and sells petrochemical products.

Cosmo Energy Holdings Co., Ltd. operates as a holding company.  The Company, through its subsidiaries, imports, refines, and sells crude oil as well engages in the independent development of oil resources.

Japan Petroleum Exploration Co., Ltd. explores, develops, and markets petroleum products such as crude oil and natural gas.

NIPPON GAS CO., LTD. provides LPG (liquefied petroleum gas), gas related apparatus, gas air conditioning equipment, and gas supplying work.  The Company also operates real estate business.

ITOCHU ENEX CO., LTD. distributes various kinds of fuel products such as oil, gasoline, and liquefied petroleum gas.  The Company, affiliated with Itochu Corp, manages many gas stations as well as convenience stores.  Itochu Enex also provides catalog sales of household goods.

MITSUUROKO GROUP HOLDINGS CO., LTD. wholesales a variety of fuel products such as liquefied petroleum gas, coal, and briquettes products.  The Company also sells gas appliances and oil-heating equipment.  MITSUUROKO operates office leasing business as well.

SAN-AI OIL CO., LTD. primarily wholesales petroleum and LP gas nationwide.  The Company also supplies fuels for aircrafts at Haneda Airport.  San-Ai Oil has business divisions including industry energy, gas, chemical and research, and business development.

SALA CORPORATION is a holding company which operates and manages its subsidiaries.  The Company provides energy supply and solution, and facility management services through its subsidiaries.  Other services include infrastructure development, animals' health care, auto services, and logistic business.

SINANEN HOLDINGS CO., LTD. is a fuel distributor specializing in petroleum products. The Company diversifies into briquettes, liquefied petroleum gas, and other petroleum products.  Sinanen also sells cooling/heating equipment and hot water supply system as well as operates real estate businesses.

PTT Exploration and Production Public Company Limited explores for crude oil and natural gas, develops fields for production, and produces oil and natural gas. The Company is a subsidiary of the Petroleum Authority of Thailand.

China Petroleum & Chemical Corporation produces and trades petroleum and petrochemical products. The Company offers gasoline, diesel, jet fuel, kerosene, ethylene, synthetic fibers, synthetic rubber, synthetic resins, and chemical fertilizers. China Petroleum & Chemical markets its products throughout China.

Santos Limited explores for and produces natural gas, crude oil, condensate, naphtha and liquid petroleum gas.  The Company conducts major onshore and offshore petroleum exploration activities at oil and gas fields in Australia (Cooper/Eromanga Basins), the United States (Gulf of Mexico), Indonesia and Papua New Guinea. The Company also transports crude oil by pipeline.

Origin Energy Limited is an integrated energy company. The Company is an energy retailer in Australia across electricity, gas and LPG. Origin Energy also holds a generation portfolio and fuel position and a renewable energy portfolio, as well as unconventional gas and LNG interests.

APA Corporation operates as an oil and gas company. The Company focuses on exploration and production of oil and gas properties. APA serves clients worldwide.

Marathon Oil Corporation is an independent international energy company engaged in exploration and production, oil sands mining and integrated gas. The Company's operations are focused in North America, Africa and Europe.

EQT Corporation is an integrated energy company with emphasis on Appalachian area natural-gas supply, transmission and distribution. The Company, through its subsidiaries, offer natural gas products to wholesale and retail customers.

Bharat Petroleum Corporation Limited explores for and refines crude oil. The Company manufactures petroleum, petroleum products, lubricants, liquefied petroleum gas, aromatics like benzene and toluene, and other related products. Bharat has retail outlets throughout the country.

Chesapeake Energy Corporation produces oil and natural gas. The Company's operations are focused on discovering, developing, and acquiring conventional and unconventional natural gas reserves onshore in the United States.

PT Dian Swastatika Sentosa Tbk generates electricity and steam.  The Company owns  and operates coal- and gas-fired plants.

ENEOS Holdings, Inc. operates refining and marketing businesses. The Company refines and distributes petroleum and petroleum chemical products. ENEOS Holdings also provides non ferrous metals, electronic materials, and other products.

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ENEOS Holdings (5020 JP)

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