Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

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

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

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

Event-Driven

<p>We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei. Given extreme looking skews even in individual names it does not seem unreasonable that some relative value fund(s) are exiting positions aggressively prior to what could be a key long weekend for Japan with potentially heavy volatility on Monday. We examine some striking performance discrepancies below.</p>

We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei. Given extreme looking skews even in individual names it does not seem unreasonable that some relative value fund(s) are exiting positions aggressively prior to what could be a key long weekend for Japan with potentially heavy volatility on Monday. We examine some striking performance discrepancies below.

What Is Getting Blown Out of Portfolios Before the Long Weekend in Japan?

<p>With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to favour TOPIX-based ETFs over Nikkei-based ETFs it made sense for TOPIX to outperform Nikkei today. However, we found the degree of outperformance to be slightly surprising as TOPIX rose 2.60% while the Nikkei barely squeaked out a +0.06% gain. Below, we examine some individual names within the two indices to try and identify pairs which could generate alpha based on this theme.</p>

With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to favour TOPIX-based ETFs over Nikkei-based ETFs it made sense for TOPIX to outperform Nikkei today. However, we found the degree of outperformance to be slightly surprising as TOPIX rose 2.60% while the Nikkei barely squeaked out a +0.06% gain. Below, we examine some individual names within the two indices to try and identify pairs which could generate alpha based on this theme.

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div><p>The short notional in the market for the data released 17 March is US$22.75bn (up by US$604mm excluding FX movements) with the largest short positions in <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1:1">Canon Inc (7751 JP)</a> and <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>.</p></div><div><p>Most shorted stocks as a percentage of free float are <a href="https://www.smartkarma.com/entities/anritsu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:3700:1">Anritsu Corp (6754 JP)</a>, <a href="https://www.smartkarma.com/entities/taiyo-yuden-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9924:1">Taiyo Yuden (6976 JP)</a>, <a href="https://www.smartkarma.com/entities/aruhi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:26072:1">Aruhi Corp (7198 JP)</a> and <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1">Tokai Carbon (5301 JP)</a> while the stocks with the highest days to cover are <a href="https://www.smartkarma.com/entities/nitta-gelatin-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:1481:1">Nitta Gelatin (4977 JP)</a>, <a href="https://www.smartkarma.com/entities/vital-ksk-holdings-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:7398:1">Vital Ksk Holdings (3151 JP)</a>, <a href="https://www.smartkarma.com/entities/j-trust-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:20246:1">J Trust Co Ltd (8508 JP)</a>, <a href="https://www.smartkarma.com/entities/katakura-industries-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:2007:1">Katakura Industries (3001 JP)</a> and <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:18448:1">Itochu Corp (8001 JP)</a>. </p></div><div><p>The largest increases in short notional over the week were <a href="https://www.smartkarma.com/entities/familymart-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:320:1">Familymart UNY Holdings (8028 JP)</a>, <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-gro" target="_blank" rel="noopener" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a>, <a href="https://www.smartkarma.com/entities/nippon-steel-corporation" target="_blank" rel="noopener" data-smartkarma-citation="entities:961:1">Nippon Steel Corporation (5401 JP)</a> and <a href="https://www.smartkarma.com/entities/trend-micro-inc" target="_blank" rel="noopener" data-smartkarma-citation="entities:13172:1">Trend Micro Inc (4704 JP)</a> while shorts were covered in <a href="https://www.smartkarma.com/entities/seven-i-holdings-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:1041:1">Seven &amp; I Holdings (3382 JP)</a>, <a href="https://www.smartkarma.com/entities/fuji-heavy-industries-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:5439:1">Subaru Corp (7270 JP)</a>, <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:12933:1">Kao Corp (4452 JP)</a> and <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a>.   <a href="https://www.smartkarma.com/entities/tokai-carbon-co-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:9145:1"></a></p></div><div><p>Sectorally, short positions increased in Industrials (US$188m), Information Technology (US$186m) and Materials (US$139m), while shorts were covered in Consumer Staples (US$46m) and Consumer Discretionary (US$20m).</p></div>

The short notional in the market for the data released 17 March is US$22.75bn (up by US$604mm excluding FX movements) with the largest short positions in Itochu Corp (8001 JP), Toyota Motor (7203 JP), Fast Retailing (9983 JP), Canon Inc (7751 JP) and Taiyo Yuden (6976 JP).Most shorted stocks as a percentage of free float are Anritsu Corp (6754 JP), Taiyo Yuden (6976 JP), Aruhi Corp (7198 JP) and Tokai Carbon (5301 JP) while the stocks with the highest days to cover are Nitta Gelatin (4977 JP), Vital Ksk Holdings (3151 JP), J Trust Co Ltd (8508 JP), Katakura Industries (3001 JP) and Itochu Corp (8001 JP). The largest increases in short notional over the week were Familymart UNY Holdings (8028 JP), Mitsubishi UFJ Financial (MUFG) (8306 JP), Nippon Steel Corporation (5401 JP) and Trend Micro Inc (4704 JP) while shorts were covered in Seven &amp; I Holdings (3382 JP), Subaru Corp (7270 JP), Kao Corp (4452 JP) and Fast Retailing (9983 JP).   Sectorally, short positions increased in Industrials (US$188m), Information Technology (US$186m) and Materials (US$139m), while shorts were covered in Consumer Staples (US$46m) and Consumer Discretionary (US$20m).

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Equity Bottom-Up

<ul>
<li>
<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> has been an investor favourite for a few years and despite its sound business, its share price/valuation has almost always remained expensive.</li>
<li>The COVID-19 outbreak led to a selloff in global equities, and as a result, Fast Retailing’s share price has dropped 34% to ¥46,230 per share.</li>
<li>In this insight, we assess further downside risks to Fast Retailing’s share price and recommend what could be a good entry point to the stock in this volatile economic environment.</li>
</ul>



Fast Retailing (9983 JP) has been an investor favourite for a few years and despite its sound business, its share price/valuation has almost always remained expensive.
The COVID-19 outbreak led to a selloff in global equities, and as a result, Fast Retailing’s share price has dropped 34% to ¥46,230 per share.
In this insight, we assess further downside risks to Fast Retailing’s share price and recommend what could be a good entry point to the stock in this volatile economic environment.


Fast Retailing: What Is a Good Entry Point Amidst COVID-19 Risks?

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/342/original/2020-03-11_11-02-32.png?1583892183" class="editor-image img-responsive" data-smartkarma-image-id="122342"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/590/original/2020-03-12_07-42-03.png?1583966536" class="editor-image img-responsive" data-smartkarma-image-id="122590"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CUMULATIVE CASH FLOWS</strong> - In this third and final of our series on Japanese companies that might be compromised as the <em>Covid-19 recession</em> unfolds,  we shall look at <strong>Cumulative Cash Flows</strong>. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual <em>yuho</em> and unaudited quarterly <em>kessan tanshin</em> reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-</p><ul>
<li>
<strong>Operating Cash Flow</strong> - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.</li>
<li>
<strong>Investing Cash Flow</strong> - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.</li>
<li>
<strong>Inventory Cash Flow</strong> - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. </li>
<li>
<strong>Free Cash Flow</strong> - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.</li>
<li>
<strong>Financing Cash Flow</strong> - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.</li>
<li><p><strong>Change in Cash - </strong>Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. </p></li>
</ul><p><strong>EXCLUDED</strong> - Four companies have been excluded from our review as they have substantial financial subsidiaries - <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/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 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> which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in <a href="https://www.smartkarma.com/entities/japan-display-inc" target="_blank" data-smartkarma-citation="entities:8280:1" rel="noopener">Japan Display (6740 JP).</a></p><p><strong><a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a></strong>-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. <strong>The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.</strong></p><div class="content-highlight"><p>In the <strong>DETAIL </strong>Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. </p></div>

Source • Japan AnalyticsCUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds,  we shall look at Cumulative Cash Flows. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual yuho and unaudited quarterly kessan tanshin reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-

Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.

Investing Cash Flow - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.

Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. 

Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.

Financing Cash Flow - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.
Change in Cash - Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. 
EXCLUDED - Four companies have been excluded from our review as they have substantial financial subsidiaries - Z Holdings (4689 JP), Rakuten (4755 JP), Sony (6758 JP), Japan Post (6178 JP) which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in Japan Display (6740 JP).Toshiba (6502 JP)-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.In the DETAIL Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. 

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

Japan

FAST RETAILING CO., LTD. operates a chain of clothing stores, UNIQLO, throughout Japan and in other markets overseas including UK, China, Hong Kong, South Korea, US, France, Singapore and Russia.  The Company designs, manufactures, and retails its own line of casual clothing.

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Fast Retailing (9983 JP)

What Is Getting Blown Out of Portfolios Before the Long Weekend in Japan?

We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei....

Mio Kato

The Topix Vs. Nikkei Skew

With the BOJ announcing yesterday that it would double the upper limit of its ETF purchases to ¥12trn a year and its previous policy shift to...

Mio Kato

Shorts Jump as Markets Plunge

The short notional in the market for the data released 17 March is US$22.75bn (up by US$604mm excluding FX movements) with the largest short...

Brian Freitas

Fast Retailing: What Is a Good Entry Point Amidst COVID-19 Risks?

Fast Retailing (9983 JP) has been an investor favourite for a few years and despite its sound business, its share price/valuation has almost...

Oshadhi Kumarasiri

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds, ...

Campbell Gunn

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52-week Range

Market Cap (USDm)

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