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.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/15459" target="_blank" data-smartkarma-citation="entities:15459:1">Iwatani Corp (8088 JP)</a> is an Osaka-based small cap of JPY206bn market cap with a daily trading value of around JPY500m that we consider to have significant long term potential.The company's main business involves the import, wholesale and retail of LPG under the Marui Gas brand, but it is also involved in the industrial gas business including air separation gases as well as hydrogen, helium, argon and CO2. 88% of consolidated OP is generated by these businesses but as a wholesaler, the company is involved in a wide variety of areas, running the gamut from shatter resistance films for OLED phones to titanium to frozen foods, often at the behest of existing customers.OP has grown steadily at a CAGR of 11% between FY03/02 and FY03/17 as the ageing society in Japan has led to small LPG retailers selling out to companies such as Iwatani (the largest domestic wholesaler and retailer of LPG) and the company's foresight in establishing itself as the first and only supplier of hydrogen in liquefied form helped it raise its market share from 35% in 2004 to 70% in 2017. The company's financial strength has also increased as net D/E has fallen from 398% in FY03/02 to 61% in the most recent quarter and operating cash flow has doubled since 2002. Taking 3 year periods to smooth out volatility, the three year period to FY03/02 saw a cumulative JPY40.7bn in operating cash flow and JPY10.4bn in FCF while the three year period to FY03/17 saw cumulative operating cash flow of JPY116.3bn and FCF of JPY45.1bn.Looking forward, we believe profitability growth should accelerate in both the LPG business as well as in industrial gases. We believe the strengthened balance sheet and growing cash flow should allow the company to accelerate consolidation in the retail space for LPG thanks to a ready built pipeline of about 3,200 companies retailing its Marui Gas product. Despite being the largest retailer, serving 880k households, the company's share is just 3.5% so saturation is not an issue and the retailers of its gas serve a total of 3.1m households.In the industrial gas business, various projections have domestic hydrogen use expanding from 400m Nm3 (about 36k tons by weight) to 4-9bn Nm3 (360-810k tons) in 2025 and 78-130bn Nm3 (7-12m tons) by 2050. The majority of this demand is slated for power generation purposes (about half) with about 30% for household and industrial fuel cell and the remainder for FCVs. We believe the power generation demand is likely to come through as we are at the cusp of commercialisation of mixed hydrogen/natural gas turbines such as those developed by <a href="https://www.smartkarma.com/entities/8790" target="_blank" data-smartkarma-citation="entities:8790:1">Kawasaki Heavy Industries (7012 JP)</a>.Growth from the LPG segment is likely to be steady and we expect volumes to continue growing steadily by at least 3% per year. This should have a more significant impact on OP however as margins in retail are several times those in wholesale. Our estimates suggest that OP for the segment is likely to continue growing at a double digit CAGR for the foreseeable future though in the short term, LPG import prices can have an impact on profitability. In the Industrial Gases &amp; Machinery segment, we estimate that about 8.5% of the JPY166bn in revenue was generated by hydrogen sales. Hydrogen volumes are forecast to grow 10-22.5x by 2025 and more than 200x by 2050 though prices are expected to fall by 60-80% over these time periods. While we consider these forecasts to be optimistic, they do imply that the domestic hydrogen market could grow from JPY26.8bn in 2017 to JPY160-360bn by 2025 - a 25-38% CAGR.Valuations are also very reasonable. Iwatani trades at 10.5x FY03/19 consensus PE (we believe OP could be 20% above consensus) and 10.8x EV/OP. Peers are trading at multiples of about 20x PE and 15x EV/OP suggesting very healthy upside for the stock, particularly if our above consensus estimates prove accurate.

Iwatani Corp (8088 JP) is an Osaka-based small cap of JPY206bn market cap with a daily trading value of around JPY500m that we consider to have significant long term potential.The company's main business involves the import, wholesale and retail of LPG under the Marui Gas brand, but it is also involved in the industrial gas business including air separation gases as well as hydrogen, helium, argon and CO2. 88% of consolidated OP is generated by these businesses but as a wholesaler, the company is involved in a wide variety of areas, running the gamut from shatter resistance films for OLED phones to titanium to frozen foods, often at the behest of existing customers.OP has grown steadily at a CAGR of 11% between FY03/02 and FY03/17 as the ageing society in Japan has led to small LPG retailers selling out to companies such as Iwatani (the largest domestic wholesaler and retailer of LPG) and the company's foresight in establishing itself as the first and only supplier of hydrogen in liquefied form helped it raise its market share from 35% in 2004 to 70% in 2017. The company's financial strength has also increased as net D/E has fallen from 398% in FY03/02 to 61% in the most recent quarter and operating cash flow has doubled since 2002. Taking 3 year periods to smooth out volatility, the three year period to FY03/02 saw a cumulative JPY40.7bn in operating cash flow and JPY10.4bn in FCF while the three year period to FY03/17 saw cumulative operating cash flow of JPY116.3bn and FCF of JPY45.1bn.Looking forward, we believe profitability growth should accelerate in both the LPG business as well as in industrial gases. We believe the strengthened balance sheet and growing cash flow should allow the company to accelerate consolidation in the retail space for LPG thanks to a ready built pipeline of about 3,200 companies retailing its Marui Gas product. Despite being the largest retailer, serving 880k households, the company's share is just 3.5% so saturation is not an issue and the retailers of its gas serve a total of 3.1m households.In the industrial gas business, various projections have domestic hydrogen use expanding from 400m Nm3 (about 36k tons by weight) to 4-9bn Nm3 (360-810k tons) in 2025 and 78-130bn Nm3 (7-12m tons) by 2050. The majority of this demand is slated for power generation purposes (about half) with about 30% for household and industrial fuel cell and the remainder for FCVs. We believe the power generation demand is likely to come through as we are at the cusp of commercialisation of mixed hydrogen/natural gas turbines such as those developed by Kawasaki Heavy Industries (7012 JP).Growth from the LPG segment is likely to be steady and we expect volumes to continue growing steadily by at least 3% per year. This should have a more significant impact on OP however as margins in retail are several times those in wholesale. Our estimates suggest that OP for the segment is likely to continue growing at a double digit CAGR for the foreseeable future though in the short term, LPG import prices can have an impact on profitability. In the Industrial Gases &amp; Machinery segment, we estimate that about 8.5% of the JPY166bn in revenue was generated by hydrogen sales. Hydrogen volumes are forecast to grow 10-22.5x by 2025 and more than 200x by 2050 though prices are expected to fall by 60-80% over these time periods. While we consider these forecasts to be optimistic, they do imply that the domestic hydrogen market could grow from JPY26.8bn in 2017 to JPY160-360bn by 2025 - a 25-38% CAGR.Valuations are also very reasonable. Iwatani trades at 10.5x FY03/19 consensus PE (we believe OP could be 20% above consensus) and 10.8x EV/OP. Peers are trading at multiples of about 20x PE and 15x EV/OP suggesting very healthy upside for the stock, particularly if our above consensus estimates prove accurate.

Iwatani: The Unsexy Ageing Demographic Play with a Pinch of Hydrogen Economy and a Dash of 10x PE

Doing bespoke work since 2002....., Custom Products Group

Patrick Hansen

Doing bespoke work since 2002.....

Custom Products Group

Custom Products was started 14 years ago at Lehman Brothers by current co-founder Patrick Hansen, CFA. After 3 years at Lehman, Patrick moved the team to Macquarie Securities where Simon Rigney (co-founder) joined. 3 years ago we took Custom Products independent. 

Our core strength can be summed up three words. 1- Customization - we have very little off the shelf products and most work is done on a one on one bespoke basis. 2- Speed - We pride ourselves in our ability to get requests back to the client very quickly. 3- Confidentiality - We do not redistribute. There is no grace period where we wait a week and then mass blast. Any request stops with that client.

With a couple weeks left before year-end Earnings Season really starts up there is still time for companies to adjust their full-year guidance. We went back over the last 7 years to find which companies historical wait until the last minute to adjust numbers. To eliminate noise we only screened for Net Income guidance changes greater than absolute 10%.<h2>Screen Criteria</h2><ol>
<li>Earnings Results were always announced in May (Do want to pick up any rollovers)</li>
<li>Only March year-end names</li>
<li>The guidance change is…</li>
</ol>

With a couple weeks left before year-end Earnings Season really starts up there is still time for companies to adjust their full-year guidance. We went back over the last 7 years to find which companies historical wait until the last minute to adjust numbers. To eliminate noise we only screened for Net Income guidance changes greater than absolute 10%.Screen Criteria
Earnings Results were always announced in May (Do want to pick up any rollovers)
Only March year-end names
The guidance change is…


Which Companies in Japan Revise Guidance in April....

Japan

IWATANI CORPORATION is a trading company supplying gases for industrial and household use.  The Company also handles fuel, consumer products, industrial materials, minerals, construction, agriculture, and medical products.  Iwatani produces liquid hydrogen with Mitsubishi Heavy Industries.

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Iwatani Corp (8088 JP)

Iwatani: The Unsexy Ageing Demographic Play with a Pinch of Hydrogen Economy and a Dash of 10x PE

Iwatani Corp (8088 JP) is an Osaka-based small cap of JPY206bn market cap with a daily trading value of around JPY500m that we consider to have...

Mio Kato

Which Companies in Japan Revise Guidance in April....

With a couple weeks left before year-end Earnings Season really starts up there is still time for companies to adjust their full-year guidance. We...

Custom Products Group

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