'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)

FROM OPERATING TO FINANCING CASH FLOWS -  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.<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>JAPAN 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<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%.<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>..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.

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

Telco/Internet specialist

Kirk Boodry

Redex Research

The Ministry of Internal Affairs and Communications (MIC, the regulator) has published Q4 18 (Mar-19) data for mobile virtual network operator (MVNO) subscriptions. The key takeaway is the lowest MVNO subscriber growth to date, underscoring how the regulatory focus on promoting competition has moved from wholesale penetration targets to support for a facilities-based new entrant.  Rakuten MVNO growth was in line with the sector and as we mentioned last quarter we expect that it will be less aggressive in the run-up to its facilities-based launch in October.

The Ministry of Internal Affairs and Communications (MIC, the regulator) has published Q4 18 (Mar-19) data for mobile virtual network operator (MVNO) subscriptions. The key takeaway is the lowest MVNO subscriber growth to date, underscoring how the regulatory focus on promoting competition has moved from wholesale penetration targets to support for a facilities-based new entrant.  Rakuten MVNO growth was in line with the sector and as we mentioned last quarter we expect that it will be less aggressive in the run-up to its facilities-based launch in October. 

Japan Mobile: MVNO Growth Record Low for Second Straight Quarter

ja research

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

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/083/132/original/2019-03-25_18-58-11.png?1553507902" class="editor-image img-responsive" data-smartkarma-image-id="83132"></figure>Source: Japan Analytics
</div>There are currently 241 listed Japanese companies that can be categorised as Internet businesses. Our classification overlaps with the TOPIX-33 Information &amp; Communication sub-Sector but is broader in that it encompasses all companies listed on all sections and exchanges but is also narrower in that we have excluded Telecommunications (including <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">S</a><a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">oftbank Group (9984 JP)</a>) and Information Technology companies. We have adopted a 'quantamental' approach which covers the long-term and current trends for Japan's Internet Sector as a whole, as well as eight sub-Sectors or Peer Groups and the Sectors' leading companies by market capitalisation.  Our focus is exclusively on the locally-listed universe and is based on disclosed financial and market data. We do not provide any forecasts, other than the companies' own forecasts and we do not attempt to make any business model or strategic judgments. Our focus is purely on financial and market performance. We do not cover unlisted and defunct companies such as Livedoor and, therefore, there is implicit survivor bias in the data. The broad themes that are developed in DETAIL below are grouped into six topics as follows: - • SUMMARY •  • FUNDAMENTAL OVERVIEW •  • SCORING - RESULTS &amp; REVISIONS / RELATIVE PRICE •  • RESULTS TRENDS •  • VALUATION • • RECOMMENDATIONS •<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/083/206/original/2019-03-25_17-46-58.png?1553565764" class="editor-image img-responsive" data-smartkarma-image-id="83206"></figure><div class="content-caption">Source: Japan Analytics</div>OVERVIEW - As will be covered in greater DETAIL below, Japan has failed to evolve a substantial Internet Sector and, in many business models, has been passed by global competitors including in the home market. Although Internet Sector revenues have grown steadily and now account for close to 1% of the total for all listed companies, operating margins have declined by half in the last seven years and are now only four percentage points higher than the market average. Accordingly, as measured by our Results &amp; Revision Score, the Sector is close to a twelve-year low. The market's response is an unchanged Sector weight in the market composite despite the addition of 111 new companies in the last six years, and a Relative Price Score that has moved in a narrow range over that period. The Sector averages disguise the weak business and market performance of a handful of Sector leaders as well as the overvaluation of the Sector's more successful business models, which is partly a result of a lack of alternatives. Despite the world's most significant Internet investor - <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group (9984 JP)</a>'s Vision Fund - being based in Japan, this fund and other global investors in Internet business have been right to give Japan a 'pass'.


Source: Japan Analytics
There are currently 241 listed Japanese companies that can be categorised as Internet businesses. Our classification overlaps with the TOPIX-33 Information &amp; Communication sub-Sector but is broader in that it encompasses all companies listed on all sections and exchanges but is also narrower in that we have excluded Telecommunications (including Softbank Group (9984 JP)) and Information Technology companies. We have adopted a 'quantamental' approach which covers the long-term and current trends for Japan's Internet Sector as a whole, as well as eight sub-Sectors or Peer Groups and the Sectors' leading companies by market capitalisation.  Our focus is exclusively on the locally-listed universe and is based on disclosed financial and market data. We do not provide any forecasts, other than the companies' own forecasts and we do not attempt to make any business model or strategic judgments. Our focus is purely on financial and market performance. We do not cover unlisted and defunct companies such as Livedoor and, therefore, there is implicit survivor bias in the data. The broad themes that are developed in DETAIL below are grouped into six topics as follows: - • SUMMARY •  • FUNDAMENTAL OVERVIEW •  • SCORING - RESULTS &amp; REVISIONS / RELATIVE PRICE •  • RESULTS TRENDS •  • VALUATION • • RECOMMENDATIONS •Source: Japan AnalyticsOVERVIEW - As will be covered in greater DETAIL below, Japan has failed to evolve a substantial Internet Sector and, in many business models, has been passed by global competitors including in the home market. Although Internet Sector revenues have grown steadily and now account for close to 1% of the total for all listed companies, operating margins have declined by half in the last seven years and are now only four percentage points higher than the market average. Accordingly, as measured by our Results &amp; Revision Score, the Sector is close to a twelve-year low. The market's response is an unchanged Sector weight in the market composite despite the addition of 111 new companies in the last six years, and a Relative Price Score that has moved in a narrow range over that period. The Sector averages disguise the weak business and market performance of a handful of Sector leaders as well as the overvaluation of the Sector's more successful business models, which is partly a result of a lack of alternatives. Despite the world's most significant Internet investor - Softbank Group (9984 JP)'s Vision Fund - being based in Japan, this fund and other global investors in Internet business have been right to give Japan a 'pass'. 

🇯🇵 Japan • Internet Sector Review - 'Japan Passing'

Specialist in Japanese equities, Kheiron Group

Nathan Ramler, CFA

Specialist in Japanese equities

Kheiron Group

Tokyo-based with experience in global equity markets and M&A. Striving to add value and insight. 

Specialists in Japan

In the latest data, MVNOs (mobile virtual network operators) have reached 7.0% market share of Japan's main 3G and LTE (4G) services with over 12m subscribers. Government support remains robust for the MVNOs. Mr. Suga, the Chief Cabinet Secretary, has suggested that MVNOs, in all forms, should expand to 50% of the market in the future. As <a href="https://www.smartkarma.com/entities/31" target="_blank" data-smartkarma-citation="entities:31:1">Rakuten (4755 JP)</a> prepares for its full MNO (mobile network operator) service launch later this year, the Rakuten MVNO services continues to execute well, taking market share and building a formidable foundation of subscribers. Rakuten is now Japan's largest MVNO by customer numbers. We expect Rakuten will struggle to make a reasonable return on its MNO on a standalone basis, but it may strengthen the company’s overall ecosystem and create enough synergies to add positive value to the group.

In the latest data, MVNOs (mobile virtual network operators) have reached 7.0% market share of Japan's main 3G and LTE (4G) services with over 12m subscribers. Government support remains robust for the MVNOs. Mr. Suga, the Chief Cabinet Secretary, has suggested that MVNOs, in all forms, should expand to 50% of the market in the future. As Rakuten (4755 JP) prepares for its full MNO (mobile network operator) service launch later this year, the Rakuten MVNO services continues to execute well, taking market share and building a formidable foundation of subscribers. Rakuten is now Japan's largest MVNO by customer numbers. We expect Rakuten will struggle to make a reasonable return on its MNO on a standalone basis, but it may strengthen the company’s overall ecosystem and create enough synergies to add positive value to the group.

Growing MVNO Market Share in Japan Looks Positive for Evolving Entrants like Rakuten (4755 JP)

Comments from politicians may be more bark than bite, but clearly the recent remarks on Japanese mobile phone bills being excessive are, and need to be, taken seriously by investors, especially in light of the high degree of share price volatility over the past months.Following up on our Insight <a href="https://www.smartkarma.com/insights/japan-telcos-softbank-9984-jp-docomo-9437-jp-kddi-9433-jp-pushed-to-improve-pricing-practices" target="_blank" data-smartkarma-citation="insights:23752">Japan Telcos (SoftBank, 9984 JP; Docomo, 9437 JP; KDDI, 9433 JP) Pushed to Improve Pricing Practices</a> and the high-profile news events over the past few months in which members of the Japanese government suggested mobile prices should come down by as much as 40%, we have spoken with a variety of industry participants to gain some insights as to what the motivations for change are and what is likely to actually change.What is clear: the MIC (Ministry of Internal Affairs and Communications), which is responsible for overseeing the telecom industry, is pushing for lower prices. Why? The consumption tax hike is a very high priority for Prime Minister Abe. The next consumption tax hike, from 8% to 10%, is planned for October 2019, and it appears that the government wants to reduce the cost of mobile services for consumers in order to ease the impact of the tax increase.According to one interviewee, "The changes coming are not new laws or changes to laws but rather a shaping of public opinions."

Comments from politicians may be more bark than bite, but clearly the recent remarks on Japanese mobile phone bills being excessive are, and need to be, taken seriously by investors, especially in light of the high degree of share price volatility over the past months.Following up on our Insight Japan Telcos (SoftBank, 9984 JP; Docomo, 9437 JP; KDDI, 9433 JP) Pushed to Improve Pricing Practices and the high-profile news events over the past few months in which members of the Japanese government suggested mobile prices should come down by as much as 40%, we have spoken with a variety of industry participants to gain some insights as to what the motivations for change are and what is likely to actually change.What is clear: the MIC (Ministry of Internal Affairs and Communications), which is responsible for overseeing the telecom industry, is pushing for lower prices. Why? The consumption tax hike is a very high priority for Prime Minister Abe. The next consumption tax hike, from 8% to 10%, is planned for October 2019, and it appears that the government wants to reduce the cost of mobile services for consumers in order to ease the impact of the tax increase.According to one interviewee, "The changes coming are not new laws or changes to laws but rather a shaping of public opinions."

Lions and Tigers and Politicians, Oh My! Update on Japan Telecoms’ Fee Changes and Potential Risks

Japan

Kakaku.com, Inc provides price comparison services and products information through its website.  The Company also provides Internet advertising services.

mixi, Inc. operates community style website, mixi.  The Company sells advertising spaces on its website.  mixi also runs online recruiting services for IT related positions.

GMO Internet, Inc. provides internet related services to its corporate customers. The company offers domain, server, security and settlement services through its "WEB Infrastructure & EC" business, and assists companies in attracting web users through its "Internet Media" business.

DeNA Co., Ltd. operates social media site, auction and shopping web site such as Mobage-town and Bidders.  DeNA also provides mobile-related services such as mobile game and community site.

DIP Corporation provides matching services through Internet for job agencies and job seekers. The Company also provides matching services for companies and part-time workers as well as companies and job agencies.

SAKURA internet Inc. provides comprehensive Internet service to businesses. The Company operates a data center and leases space to store clients' servers and network equipment.  Sakura Internet also offers web hosting and Internet connectivity services.

SMS CO.,LTD. is a website operator regarding elderly care.  On its websites, the company provides a variety of information contents related to employment placements for senior care assistants and doctors, as well as medical and nursing qualifications.

Gree, Inc. operates a Social Network Service, GREE for PC and mobile users. The website provides online communities and games to its members. The Company also sells advertising space through advertising agencies.

Bengo4.com Inc offers lawyer and tax accountant advisory website services.

Infomart Corporation provides business to business (B2B) e-commerce services for food industry.  The Company offers ordering systems as well as database systems that contain detailed information about food ingredients.

Five9, Inc. provides cloud contact center software. The Company offers real-time and historical reporting, recording, quality monitoring, workforce, and customer relationship management integrations. Five9 serves customers worldwide.

Alarm.com Holdings, Inc. provides interactive security solutions for home and business owners. The Company offers security systems such as image sensor, crash and smash protection, web control, mobile access, and video monitoring. Alarm.com Holdings operates worldwide.

Wangsu Science & Technology Co., Ltd. provides online business solutions in China. The Company also provides Content Delivery Network (CDN), and Internet Data Centers (IDC).

Shanghai Wangsu Science & Technology Co (300017 CH)

Envestnet, Inc. develops and markets computer software for financial advisors. The Company develops Internet-based software that includes risk assessment, investment strategy selection, asset allocation, research and due diligence, portfolio construction, proposal generation, paperwork preparation, model management, account rebalancing, account monitoring, and other features.

Yelp Inc. operates a social networking, user review, and local search web site. The Company provides the site as a guide for online search capabilities for its visitors to find reviews and details about local businesses. Yelp provides listings for businesses throughout the United States and Canada.

Ziff Davis, Inc. operates as a digital media and Internet company. The Company provides portfolio which includes brands in technology, entertainment, shopping, health, cybersecurity, and martech. Ziff Davis serves customers worldwide.

People.cn Company Limited mainly engages in internet advertising, information services, mobile value-added and technical services. The Company's main products include original messages, government information services, public opinion research and consulting, mobile news, and ISP services.

Autohome Inc is an online destination for automobile consumers in China.  The Company delivers comprehensive, independent and interactive content to automobile buyers and owners.

GDS Holdings Limited operates as a holding company. The Company, through its subsidiaries, develops and operates data centers. GDS Holdings offers risk and security management, information technology planing, remote monitoring, cloud hosting, virtualization, disaster recovery, and remote data protection services.

INESA Intelligent Tech Inc. operates in the IT industry. The Company designs and manages cloud servers and big data applications for businesses. INESA Intelligent also manufactures electronic components.

Internet Initiative Japan Inc. provides Internet connection services for businesses.  The Company also provides system integration services and sells system equipments.  Internet Initiative Japan offers a variety of services, including network consulting, security, and Web hosting as well.

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Internet Initiative Japan (3774 JP)

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

FROM OPERATING TO FINANCING CASH FLOWS - Having examined Operating Cash Flow in our previous Insight, we shall look into the 'stressors' between...

Campbell Gunn

Japan Mobile: MVNO Growth Record Low for Second Straight Quarter

The Ministry of Internal Affairs and Communications (MIC, the regulator) has published Q4 18 (Mar-19) data for mobile virtual network operator...

Kirk Boodry

🇯🇵 Japan • Internet Sector Review - 'Japan Passing'

There are currently 241 listed Japanese companies that can be categorised as Internet businesses. Our classification overlaps with the TOPIX-33...

Campbell Gunn

Lions and Tigers and Politicians, Oh My! Update on Japan Telecoms’ Fee Changes and Potential Risks

Comments from politicians may be more bark than bite, but clearly the recent remarks on Japanese mobile phone bills being excessive are, and need...

Nathan Ramler, CFA

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52-week Range

Market Cap (USDm)

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

FROM OPERATING TO FINANCING CASH FLOWS - Having examined Operating Cash Flow in our previous Insight, we shall look into the 'stressors' between...

Campbell Gunn

Japan Mobile: MVNO Growth Record Low for Second Straight Quarter

The Ministry of Internal Affairs and Communications (MIC, the regulator) has published Q4 18 (Mar-19) data for mobile virtual network operator...

Kirk Boodry

🇯🇵 Japan • Internet Sector Review - 'Japan Passing'

There are currently 241 listed Japanese companies that can be categorised as Internet businesses. Our classification overlaps with the TOPIX-33...

Campbell Gunn

Growing MVNO Market Share in Japan Looks Positive for Evolving Entrants like Rakuten (4755 JP)

In the latest data, MVNOs (mobile virtual network operators) have reached 7.0% market share of Japan's main 3G and LTE (4G) services with over 12m...

Nathan Ramler, CFA

Lions and Tigers and Politicians, Oh My! Update on Japan Telecoms’ Fee Changes and Potential Risks

Comments from politicians may be more bark than bite, but clearly the recent remarks on Japanese mobile phone bills being excessive are, and need...

Nathan Ramler, CFA