Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

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.

Event-Driven

<p>In <a href="https://www.smartkarma.com/insights/japan-cosmetics-pair-trade-long-kose-short-shiseido" target="_blank" rel="noopener">Japan Cosmetics Pair Trade: Long Kose/​​Short Shiseido</a>, we suggested that <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a> could outperform <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a> and the rest of the Japanese cosmetics peers. Since then, Kose’s share price increased by 20.2%, while Shiseido’s price decreased by 2.3%.</p>
<p>As the earnings season approaches, we suggest that investors consider closing the Long Kose/Short Shiseido trade and reversing the same, but this time with <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> as the hedge.</p>

In Japan Cosmetics Pair Trade: Long Kose/​​Short Shiseido, we suggested that Kose Corp (4922 JP) could outperform Shiseido Company (4911 JP) and the rest of the Japanese cosmetics peers. Since then, Kose’s share price increased by 20.2%, while Shiseido’s price decreased by 2.3%.
As the earnings season approaches, we suggest that investors consider closing the Long Kose/Short Shiseido trade and reversing the same, but this time with Fancl Corp (4921 JP) as the hedge.

Japan Cosmetics Pair Trade: Long Fancl/Short Kose

Equity Bottom-Up

<p>As lockdowns and restrictions eased towards the end of the second quarter and into the third quarter, Japanese cosmetics companies are expected to stage a comeback in 3Q2020. As a result, all major Japanese cosmetics companies (excluding Pola Orbis, who is struggling to regain its mojo) are trading near their historical high FY+2 EV/EBIT multiples.</p><p>Main overseas markets have performed exceptionally well during the July and August 2020 months. Japan’s cosmetics exports to main countries grew 23% year-on-year during the July-August period compared to 4.5% in 2Q20.</p><p>However, domestic sales during July and August 2020 remained 25-30% lower than the pre-pandemic level. We believe the immediate domestic cosmetics sales recovery could be over. The 25-30% loss of domestic demand is predominantly a result of non-existent inbound sales while behavioural changes due to COVID-19 may have also had a small impact. We expect the behavioural changes to have a lasting impact on domestic demand. However, as travel restrictions are lifted inbound demand could return and warrant a sharp increase in domestic sales.</p><p>In this insight, we analyse Japan’s cosmetic industry using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.</p>

As lockdowns and restrictions eased towards the end of the second quarter and into the third quarter, Japanese cosmetics companies are expected to stage a comeback in 3Q2020. As a result, all major Japanese cosmetics companies (excluding Pola Orbis, who is struggling to regain its mojo) are trading near their historical high FY+2 EV/EBIT multiples.Main overseas markets have performed exceptionally well during the July and August 2020 months. Japan’s cosmetics exports to main countries grew 23% year-on-year during the July-August period compared to 4.5% in 2Q20.However, domestic sales during July and August 2020 remained 25-30% lower than the pre-pandemic level. We believe the immediate domestic cosmetics sales recovery could be over. The 25-30% loss of domestic demand is predominantly a result of non-existent inbound sales while behavioural changes due to COVID-19 may have also had a small impact. We expect the behavioural changes to have a lasting impact on domestic demand. However, as travel restrictions are lifted inbound demand could return and warrant a sharp increase in domestic sales.In this insight, we analyse Japan’s cosmetic industry using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Japanese Cosmetics Stats: Absent Inbound Demand Pauses Domestic Recovery, Exports Grow Double-Digits

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div><p>The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.</p></div><div><p>Hong Kong saw shorts rise on <a href="https://www.smartkarma.com/entities/aia-group-ltd" target="_blank" data-smartkarma-citation="entities:14895:1" rel="noopener">AIA Group Ltd (1299 HK)</a>, <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a>, <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a> and <a href="https://www.smartkarma.com/entities/esr-cayman-ltd" target="_blank" data-smartkarma-citation="entities:27983:1" rel="noopener">ESR Cayman (1821 HK)</a>, while there was short covering on <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan Dianping (3690 HK)</a>, <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a> and <a href="https://www.smartkarma.com/entities/semiconductor-manufacturing" target="_blank" data-smartkarma-citation="entities:14231:1" rel="noopener">Semiconductor Manufacturing (981 HK)</a>. Shorts increased in Industrials and Energy and were covered in Consumer Discretionary, Information Technology, Communication Services and Financials.</p></div><div><p>Japan saw an increase in shorts on <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/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> and <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> and a reduction in shorts on <a href="https://www.smartkarma.com/entities/tokyo-gas-co-ltd" target="_blank" data-smartkarma-citation="entities:2332:1" rel="noopener">Tokyo Gas (9531 JP)</a>, <a href="https://www.smartkarma.com/entities/rohm-co-ltd" target="_blank" data-smartkarma-citation="entities:2953:1" rel="noopener">ROHM Co Ltd (6963 JP)</a>, <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a> and <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a>. Sectorally, shorts increased in almost all sectors led by Communication Services, Consumer Discretionary, Financials, Information Technology, Industrials and Consumer Staples. With the September ex-dividend date coming up, a large part of the increase in short interest could be due to dividend enhancement trades.</p></div><div><p>Stocks in Korea that saw the most short covering were <a href="https://www.smartkarma.com/entities/s-oil-corp" target="_blank" data-smartkarma-citation="entities:1667:1" rel="noopener">S Oil Corp (010950 KS)</a>, <a href="https://www.smartkarma.com/entities/netmarble-corporation" target="_blank" data-smartkarma-citation="entities:22839:1" rel="noopener">Netmarble Corporation (251270 KS)</a>, <a href="https://www.smartkarma.com/entities/shinpoong-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:7296:1" rel="noopener">Shinpoong Pharmaceutical (019170 KS)</a> and <a href="https://www.smartkarma.com/entities/lg-display-co-ltd" target="_blank" data-smartkarma-citation="entities:7145:1" rel="noopener">LG Display (034220 KS)</a>. </p></div><div><p>Stocks in Taiwan that saw the highest increase in shorts were <a href="https://www.smartkarma.com/entities/alchip-technologies-ltd" target="_blank" data-smartkarma-citation="entities:20219:1" rel="noopener">Alchip Technologies (3661 TT)</a>, <a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a>, <a href="https://www.smartkarma.com/entities/genius-electronic-optical-co-ltd" target="_blank" data-smartkarma-citation="entities:9632:1" rel="noopener">Genius Electronic Optical (3406 TT)</a> and <a href="https://www.smartkarma.com/entities/txc-corp" target="_blank" data-smartkarma-citation="entities:5212:1" rel="noopener">Txc Corp (3042 TT)</a> while shorts were covered on <a href="https://www.smartkarma.com/entities/au-optronics-corp" target="_blank" data-smartkarma-citation="entities:6704:1" rel="noopener">Au Optronics (2409 TT)</a>, <a href="https://www.smartkarma.com/entities/asmedia-technology-inc" target="_blank" data-smartkarma-citation="entities:15732:1" rel="noopener">Asmedia Technology (5269 TT)</a>, <a href="https://www.smartkarma.com/entities/elan-microelectronics-corp" target="_blank" data-smartkarma-citation="entities:19789:1" rel="noopener">Elan Microelectronics (2458 TT)</a> and <a href="https://www.smartkarma.com/entities/yageo-corporation" target="_blank" data-smartkarma-citation="entities:13212:1" rel="noopener">Yageo Corporation (2327 TT)</a>.</p></div>

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.Hong Kong saw shorts rise on AIA Group Ltd (1299 HK), China Merchants Bank H (3968 HK), CNOOC Ltd (883 HK) and ESR Cayman (1821 HK), while there was short covering on Meituan Dianping (3690 HK), Ping An Insurance (H) (2318 HK), JD.com (HK) (9618 HK) and Semiconductor Manufacturing (981 HK). Shorts increased in Industrials and Energy and were covered in Consumer Discretionary, Information Technology, Communication Services and Financials.Japan saw an increase in shorts on Softbank Corp (9434 JP), Fast Retailing (9983 JP), Mitsubishi UFJ Financial (MUFG) (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP) and a reduction in shorts on Tokyo Gas (9531 JP), ROHM Co Ltd (6963 JP), Kao Corp (4452 JP) and Fancl Corp (4921 JP). Sectorally, shorts increased in almost all sectors led by Communication Services, Consumer Discretionary, Financials, Information Technology, Industrials and Consumer Staples. With the September ex-dividend date coming up, a large part of the increase in short interest could be due to dividend enhancement trades.Stocks in Korea that saw the most short covering were S Oil Corp (010950 KS), Netmarble Corporation (251270 KS), Shinpoong Pharmaceutical (019170 KS) and LG Display (034220 KS). Stocks in Taiwan that saw the highest increase in shorts were Alchip Technologies (3661 TT), TSMC (2330 TT), Genius Electronic Optical (3406 TT) and Txc Corp (3042 TT) while shorts were covered on Au Optronics (2409 TT), Asmedia Technology (5269 TT), Elan Microelectronics (2458 TT) and Yageo Corporation (2327 TT).

Asia Short Interest Weekly: Meituan, JD, PingAn, SMIC, Japan Divs, Netmarble, Shinpoong, Genius, TXC

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<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

<div class="content-highlight"><p style="text-align: center;"><strong><em>"Beware of geeks bearing formulas." - Warren Buffett </em></strong></p></div><p>Enterprise Value multiples have become common parlance in the investment world, both <strong>Enterprise Value/Operating Profit</strong> (EV/OP or EV/EBIT) and it's flawed 'bastard' cousin EV/EBITDA which we will leave well alone for this Insight. With markets supported on a cloud of central bank's liquidity and corporate trailing earnings distorted by COVID-19, many valuation ratios appear meaningless. To inject a dose of reality into the analysis of Japanese corporate valuations, we have created a new metric -<strong> Enterprise Value/Peak Operating Profit (EV/POP).</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/155/071/original/2020-08-26_10-36-07.png?1598405812" class="editor-image img-responsive" data-smartkarma-image-id="155071"></figure><div class="content-caption">Source: Japan Analytics (applies to all charts below)</div><p><strong>EV &amp; OP TIMELINE</strong> - Using currently-listed non-financial companies (with the four exceptions noted in the legend above), the correlation between Enterprise Value (here divided by 10) and Operating Income has increased since 2013. However, the current positive EV&lt;&gt;OP 'spread' is now larger than at any time since 2002. While non-financial Operating Profits have declined by 22% since peaking in the first quarter of FY2019, Enterprise Value is just ¥2.9 trillion, or 5% below its <a href="mailto:FY18-@Q" target="_blank" rel="noopener">FY18-</a>2Q peak level. Where the lines converge, the EV/OP multiple is 10 times, which is close to the sixteen-year average and the arbitrary line we shall use to distinguish the overvalued from the undervalued. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/155/075/original/2020-08-26_10-56-07.png?1598406979" class="editor-image img-responsive" data-smartkarma-image-id="155075"></figure><p><strong>EV/OP &amp; EV/POP</strong> - Aggregate EV/OP is now 11.6 times, breaking out of a narrow range to reach a  new a ten-year high. EV/POP reached a five-year low in March of 7.9 times but is now 20 basis points above the seven-year average of 8.8 times. By neither measure could the market be considered cheap; however, in EV/POP terms, aggregate valuations are only just above average.  For several favoured companies for which the market is prepared to pay any price for their perceived quality EV/POP multiple are far from average as in the examples below. At the other end of the valuation spectrum, EV/POP reveals some clear bargain-hunting opportunities.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/155/100/original/2020-08-26_13-12-11.png?1598415140" class="editor-image img-responsive" data-smartkarma-image-id="155100"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/155/102/original/2020-08-26_13-12-39.png?1598415169" class="editor-image img-responsive" data-smartkarma-image-id="155102"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/155/104/original/2020-08-26_13-15-58.png?1598415375" class="editor-image img-responsive" data-smartkarma-image-id="155104"></figure><p>In the <strong>DETAIL</strong> section, we look at the non-financial companies at more examples from both extremes of this metric, in an attempt to pick potential winners and losers as the world slowly normalises and liquidity begins to ebb.  We have purposely excluded companies with negative Enterprise Values, which we shall cover in a upcoming Insight. We have also excluded companies that have listed only in the last four years.</p>

"Beware of geeks bearing formulas." - Warren Buffett Enterprise Value multiples have become common parlance in the investment world, both Enterprise Value/Operating Profit (EV/OP or EV/EBIT) and it's flawed 'bastard' cousin EV/EBITDA which we will leave well alone for this Insight. With markets supported on a cloud of central bank's liquidity and corporate trailing earnings distorted by COVID-19, many valuation ratios appear meaningless. To inject a dose of reality into the analysis of Japanese corporate valuations, we have created a new metric - Enterprise Value/Peak Operating Profit (EV/POP).Source: Japan Analytics (applies to all charts below)EV &amp; OP TIMELINE - Using currently-listed non-financial companies (with the four exceptions noted in the legend above), the correlation between Enterprise Value (here divided by 10) and Operating Income has increased since 2013. However, the current positive EV&lt;&gt;OP 'spread' is now larger than at any time since 2002. While non-financial Operating Profits have declined by 22% since peaking in the first quarter of FY2019, Enterprise Value is just ¥2.9 trillion, or 5% below its FY18-2Q peak level. Where the lines converge, the EV/OP multiple is 10 times, which is close to the sixteen-year average and the arbitrary line we shall use to distinguish the overvalued from the undervalued. EV/OP &amp; EV/POP - Aggregate EV/OP is now 11.6 times, breaking out of a narrow range to reach a  new a ten-year high. EV/POP reached a five-year low in March of 7.9 times but is now 20 basis points above the seven-year average of 8.8 times. By neither measure could the market be considered cheap; however, in EV/POP terms, aggregate valuations are only just above average.  For several favoured companies for which the market is prepared to pay any price for their perceived quality EV/POP multiple are far from average as in the examples below. At the other end of the valuation spectrum, EV/POP reveals some clear bargain-hunting opportunities.In the DETAIL section, we look at the non-financial companies at more examples from both extremes of this metric, in an attempt to pick potential winners and losers as the world slowly normalises and liquidity begins to ebb.  We have purposely excluded companies with negative Enterprise Values, which we shall cover in a upcoming Insight. We have also excluded companies that have listed only in the last four years.

🇯🇵 JAPAN • Stock Picking with 'Peak' EV/OP Multiples - Introducing EV/POP

Japan

FANCL CORPORATION produces and sells additive-free skin care cosmetics for both women and men.  The Company's products include cleansing creams, hair care goods such as shampoos and conditioners, and facial make up products.  Fancl also makes and distributes dietary supplements including royal jelly and various tablets with extracted essence from mushrooms, garlic, ginseng, and soy beans.

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Fancl Corp (4921 JP)

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Japan Cosmetics Pair Trade: Long Fancl/Short Kose

As the earnings season approaches, we suggest that investors consider closing the Long Kose/Short Shiseido trade and reversing the same, but this...

Oshadhi Kumarasiri

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Japan’s cosmetics exports to main countries grew 23% year-on-year during the July-August period compared to 4.5% in 2Q20.

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

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🇯🇵 JAPAN • Stock Picking with 'Peak' EV/OP Multiples - Introducing EV/POP

"Beware of geeks bearing formulas." - Warren Buffett Enterprise Value multiples have become common parlance in the investment world, both...

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