'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. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/121/977/original/2020-03-09_14-29-36.png?1583731808" class="editor-image img-responsive" data-smartkarma-image-id="121977"></figure><div class="content-caption">Source • Stoxx.com</div>ALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy which built on the work of William Beaver and R.A. Fisher. Altman's original article (attached below) was published in the September 1968 issue of the Journal of Finance when he was an assistant professor of finance at NYU Stern.  The 'classic' Z-Score sampled publically-traded manufacturing companies. Later versions were formulated for private companies, non-manufacturing companies and emerging markets.  The model is between 80% and 90% accurate in predicting bankruptcy one year ahead of the event, while the rate of false positives has been between 15% and 20%.APPLICATION TO JAPAN - We have been using Altman Z-Scores in Japan since the mid-1980s. We have found the Scores to be reasonably predictive, as has been confirmed by several academic papers, including  <a href="https://www.semanticscholar.org/paper/A-Model-of-Bankruptcy-Prediction%3A-Calibration-of/5565168f75b578ba28115ef314acbdd387f82483" target="_blank" rel="noopener">Gurau (2013)</a>. The persistence of a large number of 'zombie' companies supported by banks or keiretsu 'relatives' has, however, reduced the overall 'hit' rate for larger listed companies. The following charts show a timeline of the Altman Z-Score and Market Capitalisation for several memorable Japanese corporate bankruptcies. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/005/original/2020-03-09_15-53-11.png?1583736804" class="editor-image img-responsive" data-smartkarma-image-id="122005"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/006/original/2020-03-09_15-54-52.png?1583736903" class="editor-image img-responsive" data-smartkarma-image-id="122006"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/007/original/2020-03-09_15-56-58.png?1583737032" class="editor-image img-responsive" data-smartkarma-image-id="122007"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/009/original/2020-03-09_15-59-08.png?1583737161" class="editor-image img-responsive" data-smartkarma-image-id="122009"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/011/original/2020-03-09_16-03-28.png?1583737425" class="editor-image img-responsive" data-smartkarma-image-id="122011"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-highlight">This Insight is the second part of a three-part series attempting to highlight those Japanese companies that at the highest risk from the 2020 Covid-19 recession. The first focused on the<a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-1-audit-score" target="_blank" data-smartkarma-citation="insights:37265" rel="noopener">Audit Score</a>, while a forthcoming Insight will look at Cumulative Cash Flows.</div>

Source • Stoxx.comALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy which built on the work of William Beaver and R.A. Fisher. Altman's original article (attached below) was published in the September 1968 issue of the Journal of Finance when he was an assistant professor of finance at NYU Stern.  The 'classic' Z-Score sampled publically-traded manufacturing companies. Later versions were formulated for private companies, non-manufacturing companies and emerging markets.  The model is between 80% and 90% accurate in predicting bankruptcy one year ahead of the event, while the rate of false positives has been between 15% and 20%.APPLICATION TO JAPAN - We have been using Altman Z-Scores in Japan since the mid-1980s. We have found the Scores to be reasonably predictive, as has been confirmed by several academic papers, including  Gurau (2013). The persistence of a large number of 'zombie' companies supported by banks or keiretsu 'relatives' has, however, reduced the overall 'hit' rate for larger listed companies. The following charts show a timeline of the Altman Z-Score and Market Capitalisation for several memorable Japanese corporate bankruptcies. Source • Japan AnalyticsThis Insight is the second part of a three-part series attempting to highlight those Japanese companies that at the highest risk from the 2020 Covid-19 recession. The first focused on theAudit Score, while a forthcoming Insight will look at Cumulative Cash Flows.

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

Equity Bottom-Up

If IHI completes its restructuring as planned, the upside for the stock could be 50% or more. This is what needs to be done:<ul>
<li>Complete the mismanaged Elba gas liquefaction project by June as planned and raise the operating margin of the Resources, Energy &amp; Environment division from less than 2% to at least 5%.</li>
<li>Successfully restructure Japan Marine United to eliminate equity method losses and complete the alliance with Imabari Shipbuilding.</li>
<li>Avoid additional project delays and other contractual problems.</li>
<li>Recover from the current downturn in demand for industry machinery and aircraft engines.</li>
</ul>If this can be achieved, operating profit could rise by 25% or more from the ¥60 billion management is guiding for in FY Mar-20, equity method and restructuring related losses could drop by more than ¥20 billion over the next 12 - 18 months, and net profit could more than double.Headwinds facing the company include the Corona virus and economic slowdown in Japan.

If IHI completes its restructuring as planned, the upside for the stock could be 50% or more. This is what needs to be done:
Complete the mismanaged Elba gas liquefaction project by June as planned and raise the operating margin of the Resources, Energy &amp; Environment division from less than 2% to at least 5%.
Successfully restructure Japan Marine United to eliminate equity method losses and complete the alliance with Imabari Shipbuilding.
Avoid additional project delays and other contractual problems.
Recover from the current downturn in demand for industry machinery and aircraft engines.
If this can be achieved, operating profit could rise by 25% or more from the ¥60 billion management is guiding for in FY Mar-20, equity method and restructuring related losses could drop by more than ¥20 billion over the next 12 - 18 months, and net profit could more than double.Headwinds facing the company include the Corona virus and economic slowdown in Japan. 

IHI (7013 JP): 50% Upside if Restructuring Goes as Planned

Asia Long-Short PM/Analyst

Curtis Lehnert

Event-Driven

Every dog has its day and every thing has a price. <a href="https://www.smartkarma.com/entities/2402" target="_blank" data-smartkarma-citation="entities:2402:1">Mitsui Engineer &amp; Shipbuild (7003 JP)</a> has been a dog that hasn't had its day in a long, long time. Currently trading at 56% discount to its Sum-of-the-Parts value and .46x P/B, the stock could double and still trade at a 8% discount to its liquidation value. After reporting that the company would incur significant losses of JPY 41 billion at an Indonesian thermal power plant project, the stock plunged 42% and the stub now stands 2.4 Z-scores below its long-term average.
Despite the poor state of Japanese engineering and shipbuilding companies, there remains a price that presents compelling value to investors. In this insight, I will detail the present value proposition to owning the Mitsui E&amp;S stub and discuss the following topics:
I. The Trade
II. The Industry
III. The Stub
IV. Financials

Every dog has its day and every thing has a price. Mitsui Engineer &amp; Shipbuild (7003 JP) has been a dog that hasn't had its day in a long, long time. Currently trading at 56% discount to its Sum-of-the-Parts value and .46x P/B, the stock could double and still trade at a 8% discount to its liquidation value. After reporting that the company would incur significant losses of JPY 41 billion at an Indonesian thermal power plant project, the stock plunged 42% and the stub now stands 2.4 Z-scores below its long-term average.
Despite the poor state of Japanese engineering and shipbuilding companies, there remains a price that presents compelling value to investors. In this insight, I will detail the present value proposition to owning the Mitsui E&amp;S stub and discuss the following topics:
I. The Trade
II. The Industry
III. The Stub
IV. Financials

TRADE IDEA: Mitsui E&S (7003 JP) Stub - Every Dog Has Its Day

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

TSE Tokyo Price Index TOPIX / Technical Analysis

Japanese Diversified Industrials are particularly attractive and actionable in spite of the recent global selloff in equities. In this report we focus on six stocks with the best setups in the Group: Mitsubishi Corporation (8058-JP), DAIKIN INDUSTRIES, LTD. (6367-JP), Mitsubishi Heavy Industries, Ltd. (7011-JP), IHI Corporation (7013-JP), Hitachi Metals, Ltd. (5486-JP), and Sojitz Corp. (2768-JP). Add exposure.

Japanese Diversified Industrials are particularly attractive and actionable in spite of the recent global selloff in equities. In this report we focus on six stocks with the best setups in the Group: Mitsubishi Corporation (8058-JP), DAIKIN INDUSTRIES, LTD. (6367-JP), Mitsubishi Heavy Industries, Ltd. (7011-JP), IHI Corporation (7013-JP), Hitachi Metals, Ltd. (5486-JP), and Sojitz Corp. (2768-JP). Add exposure.

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Part 2 of comments on King Street's deck <a href="https://www.unlockingtoshibavalue.com/assets/toshibapres.pdf" target="_blank">Toshiba | Unlocking Value</a> of October 3rd.
Part 1 was in <a href="https://www.smartkarma.com/insights/toshiba-king-street-s-buyback-proposals-lack-required-detail" target="_blank" data-smartkarma-citation="insights:24727">Toshiba: King Street's Buyback Proposals Lack Required Detail</a>.
Part 2 addresses the Valuation Analysis inputs and assumptions, including their structure and lack of complement. One could think that Newton's Third Law, or the concept of double-entry bookkeeping, have some application when applying dramatic changes to a company's balance sheet or cashflows. There are offsets to actions taken. The deck seems to avoid talking about some of the ugly parts so I do.
<a href="https://www.smartkarma.com/profiles/713" target="_blank" data-smartkarma-citation="accounts:713">Mio Kato, CFA</a> takes a somewhat different tack in looking at the assumptions in his piece <a href="https://www.smartkarma.com/insights/toshiba-king-street-assumptions-look-exceedingly-optimistic" target="_blank" data-smartkarma-citation="insights:24719">Toshiba: King Street Assumptions Look Exceedingly Optimistic</a>, and that too is worth a read. 

Earlier pieces include:
<table class="table table-striped">
<tbody>
<tr>
<td>Date</td>
<td>Title</td>
</tr>
<tr>
<td>21 May 2018</td>
<td><a href="https://www.smartkarma.com/insights/modelling-out-toshiba-s-return-of-capital-to-shareholders" target="_blank" data-smartkarma-citation="insights:20544">Modelling Out Toshiba's "Return of Capital to Shareholders"</a></td>
</tr>
<tr>
<td>2 June 2018</td>
<td>
<a href="https://www.smartkarma.com/insights/new-clarity-on-toshiba-s-return-of-capital-to-shareholders" target="_blank">New Clarity on Toshiba’s “Return of Capital to Shareholders”</a>
</td>
</tr>
<tr>
<td>13 June 2018</td>
<td><a href="https://www.smartkarma.com/insights/toshiba-700-billion-buyback-bigger-better-faster-stronger" target="_blank">Toshiba ¥700 Billion Buyback - Bigger*, Better, Faster, Stronger</a></td>
</tr>
<tr>
<td>5 October 2018</td>
<td><a href="https://www.smartkarma.com/insights/toshiba-king-street-s-buyback-proposals-lack-required-detail" target="_blank" data-smartkarma-citation="insights:24727">Toshiba: King Street's Buyback Proposals Lack Required Detail</a></td>
</tr>
</tbody>
</table>

Part 2 of comments on King Street's deck Toshiba | Unlocking Value of October 3rd.
Part 1 was in Toshiba: King Street's Buyback Proposals Lack Required Detail.
Part 2 addresses the Valuation Analysis inputs and assumptions, including their structure and lack of complement. One could think that Newton's Third Law, or the concept of double-entry bookkeeping, have some application when applying dramatic changes to a company's balance sheet or cashflows. There are offsets to actions taken. The deck seems to avoid talking about some of the ugly parts so I do.
Mio Kato, CFA takes a somewhat different tack in looking at the assumptions in his piece Toshiba: King Street Assumptions Look Exceedingly Optimistic, and that too is worth a read. 

Earlier pieces include:



Date
Title


21 May 2018
Modelling Out Toshiba's "Return of Capital to Shareholders"


2 June 2018

New Clarity on Toshiba’s “Return of Capital to Shareholders”



13 June 2018
Toshiba ¥700 Billion Buyback - Bigger*, Better, Faster, Stronger


5 October 2018
Toshiba: King Street's Buyback Proposals Lack Required Detail





Toshiba: King Street's Valuation Analysis Is... Punchy?

Japan

IHI Corporation manufactures heavy machinery. The Company produces aircraft jet engines, rocket propulsion systems, and ships for military and commercial use. Ishikawajima-Harima also constructs petroleum refineries and nuclear power plants.

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IHI Corp (7013 JP)

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

ALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy...

Campbell Gunn

IHI (7013 JP): 50% Upside if Restructuring Goes as Planned

If IHI completes its restructuring as planned, the upside for the stock could be 50% or more. This is what needs to be done: Complete the...

Scott Foster

TRADE IDEA: Mitsui E&S (7003 JP) Stub - Every Dog Has Its Day

Every dog has its day and every thing has a price. Mitsui Engineer & Shipbuild (7003 JP) has been a dog that hasn't had its day in a long, long...

Curtis Lehnert

Buy: Japanese Diversified Industrials

Japanese Diversified Industrials are particularly attractive and actionable in spite of the recent global selloff in equities. In this report we...

Vermilion Research

Toshiba: King Street's Valuation Analysis Is... Punchy?

Part 2 of comments on King Street's deck Toshiba | Unlocking Value of October 3rd. Part 1 was in Toshiba: King Street's Buyback Proposals Lack...

Travis Lundy

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