Equity Analyst, LightStream Research

Aqila Ali

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>This insight follows our previous insights on the <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a> parts and Hitachi Automotive Systems merger: <a href="https://www.smartkarma.com/insights/hitachi-thoughts-on-the-honda-group-autoparts-merger" target="_blank" data-smartkarma-citation="insights:34065" rel="noopener">Hitachi – Thoughts on the Honda Group Autoparts Merger</a> and <a href="https://www.smartkarma.com/insights/are-hitachi-and-honda-following-the-toyota-group-s-j-quad-dynamics-jv" target="_blank" data-smartkarma-citation="insights:34170" rel="noopener">Are Hitachi and Honda Following the Toyota Group's J-QuAD Dynamics JV?</a>.</p><p>This insight reviews <a href="https://www.smartkarma.com/entities/showa-corp" target="_blank" data-smartkarma-citation="entities:15079:1" rel="noopener">Showa Corp (7274 JP)</a>’s business outlook, its valuation, and the tender offer price. Our key points are:</p><ul>
<li>Showa’s revenue has been on a declining trend similar to peers like <a href="https://www.smartkarma.com/entities/keihin-corp" target="_blank" data-smartkarma-citation="entities:15395:1" rel="noopener">Keihin Corp (7251 JP)</a> and <a href="https://www.smartkarma.com/entities/jtekt-corp" target="_blank" data-smartkarma-citation="entities:12197:1" rel="noopener">JTEKT Corp (6473 JP)</a> which have similar product portfolios</li>
<li>Sluggish revenue performance, especially in the automobile business, is not specific to Showa.</li>
<li>Medium to long term growth prospects are attractive due to Honda’s focus on CASE and the possible accumulation of new customers after the merger</li>
<li>OPM is now above peers after its set back in FY2016 following the faulty manufacturing of gas springs.</li>
<li>OP seems to be resilient to economic conditions and has chances of improving further to give the company the necessary strength to bear any expected increase in investments for future growth.</li>
<li>In our opinion, possible decisions on aggressive investments are not likely to hurt OPM to the extent that they fall significantly below peers</li>
<li>Although Showa now trades slightly above its historical median on PE and EV/EBITDA, it still trades below peers. Despite its advantageous earnings profile, Showa is trading at a discount which does not seem to be justifiable.</li>
<li>An increase in multiples following an earning upgrade is highly likely making the current offer price look cheaply priced.</li>
<li>A shareholder push for a higher tender price seems appropriate.</li>
</ul>

This insight follows our previous insights on the Honda Motor (7267 JP) parts and Hitachi Automotive Systems merger: Hitachi – Thoughts on the Honda Group Autoparts Merger and Are Hitachi and Honda Following the Toyota Group's J-QuAD Dynamics JV?.This insight reviews Showa Corp (7274 JP)’s business outlook, its valuation, and the tender offer price. Our key points are:
Showa’s revenue has been on a declining trend similar to peers like Keihin Corp (7251 JP) and JTEKT Corp (6473 JP) which have similar product portfolios
Sluggish revenue performance, especially in the automobile business, is not specific to Showa.
Medium to long term growth prospects are attractive due to Honda’s focus on CASE and the possible accumulation of new customers after the merger
OPM is now above peers after its set back in FY2016 following the faulty manufacturing of gas springs.
OP seems to be resilient to economic conditions and has chances of improving further to give the company the necessary strength to bear any expected increase in investments for future growth.
In our opinion, possible decisions on aggressive investments are not likely to hurt OPM to the extent that they fall significantly below peers
Although Showa now trades slightly above its historical median on PE and EV/EBITDA, it still trades below peers. Despite its advantageous earnings profile, Showa is trading at a discount which does not seem to be justifiable.
An increase in multiples following an earning upgrade is highly likely making the current offer price look cheaply priced.
A shareholder push for a higher tender price seems appropriate.


Showa: Has Been Trading at a Discount to Peers, So Price It Low?

<p><a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a> Hitachi announced that its Automotive Systems company, along with three <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a> Keiretsu Group companies, are to merge as shown below:</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/104/285/original/image_49398172641572801915439.png?1572801918" class="editor-image img-responsive" data-smartkarma-image-id="104285"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/104/286/original/image_33493725651572801915439.png?1572801918" class="editor-image img-responsive" data-smartkarma-image-id="104286"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/104/284/original/image_87091671961572801915440.png?1572801918" class="editor-image img-responsive" data-smartkarma-image-id="104284"></figure><div class="content-remarks"><p><em>Source: Company Disclosures (Auto Translated)</em></p></div><p>Hitachi’s possible reasons to agree for this was looked at by Mio Kato in <a href="https://www.smartkarma.com/insights/hitachi-thoughts-on-the-honda-group-autoparts-merger" target="_blank" data-smartkarma-citation="insights:34065" rel="noopener">Hitachi – Thoughts on the Honda Group Autoparts Merger</a>.  This insight looks at the potential synergies from this merger following the disclosures made by the related companies, also highlighting how the merger could possibly allow them to achieve level 5 autonomy, a mark which almost every player in the Auto industry is racing towards.</p><div class="content-highlight"><p>Having covered <a href="https://www.smartkarma.com/entities/denso-corp" target="_blank" data-smartkarma-citation="entities:18703:1" rel="noopener">Denso Corp (6902 JP)</a> Denso closely, we are quite convinced that the supplier is leading the AD/ADAS race. That said, the news of this merger reminded us of a similar plan, Denso and a few other <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> suppliers devised last year. <a href="https://www.smartkarma.com/entities/aisin-seiki-co-ltd" target="_blank" data-smartkarma-citation="entities:11809:1" rel="noopener">Aisin Seiki (7259 JP)</a>, Advics, <a href="https://www.smartkarma.com/entities/jtekt-corp" target="_blank" data-smartkarma-citation="entities:12197:1" rel="noopener">JTEKT Corp (6473 JP)</a>, and Denso together established a new company J-QuAD Dynamicsto develop integrated control software for automated driving and related functions. We feel that Toyota’s JV and this merger are quite similar in business and technology consolidation. Although Toyota had the JV established within its group, Honda had to look for outside help probably due to its struggle for scale. Overall, it looks like Honda is starting to follow in Toyota’s footsteps.</p></div><p>The key synergies are:</p><ul>
<li>Ability to provide a complete one-stop solution for both 4W and 2W, aiming for a wider customer base.</li>
<li>Although the merged company will not be as large as the Toyota group auto part suppliers like Denso, the company could have good product diversification compared to Toyota group suppliers, serving motorcycles and sports vehicles OEMs. </li>
<li>Ability to accelerate move towards CASE.</li>
<li>Possibility to advance towards other fields where IoT is a key factor, like Medicine similar to Toyota’s Denso.</li>
<li>Cost synergies are likely following elimination of R&amp;D and related cost. In spite of such cost savings, the consolidated company, based on the estimates for FY03/20E could enjoy an OPM of around 6-6.5% higher than that of Denso and Aisin (note that the profitability of these companies has however suffered during recent years, due to their aggressive investment in L/T growth).</li>
</ul>

Hitachi Ltd (6501 JP) Hitachi announced that its Automotive Systems company, along with three Honda Motor (7267 JP) Keiretsu Group companies, are to merge as shown below:Source: Company Disclosures (Auto Translated)Hitachi’s possible reasons to agree for this was looked at by Mio Kato in Hitachi – Thoughts on the Honda Group Autoparts Merger.  This insight looks at the potential synergies from this merger following the disclosures made by the related companies, also highlighting how the merger could possibly allow them to achieve level 5 autonomy, a mark which almost every player in the Auto industry is racing towards.Having covered Denso Corp (6902 JP) Denso closely, we are quite convinced that the supplier is leading the AD/ADAS race. That said, the news of this merger reminded us of a similar plan, Denso and a few other Toyota Motor (7203 JP) suppliers devised last year. Aisin Seiki (7259 JP), Advics, JTEKT Corp (6473 JP), and Denso together established a new company J-QuAD Dynamicsto develop integrated control software for automated driving and related functions. We feel that Toyota’s JV and this merger are quite similar in business and technology consolidation. Although Toyota had the JV established within its group, Honda had to look for outside help probably due to its struggle for scale. Overall, it looks like Honda is starting to follow in Toyota’s footsteps.The key synergies are:
Ability to provide a complete one-stop solution for both 4W and 2W, aiming for a wider customer base.
Although the merged company will not be as large as the Toyota group auto part suppliers like Denso, the company could have good product diversification compared to Toyota group suppliers, serving motorcycles and sports vehicles OEMs. 
Ability to accelerate move towards CASE.
Possibility to advance towards other fields where IoT is a key factor, like Medicine similar to Toyota’s Denso.
Cost synergies are likely following elimination of R&amp;D and related cost. In spite of such cost savings, the consolidated company, based on the estimates for FY03/20E could enjoy an OPM of around 6-6.5% higher than that of Denso and Aisin (note that the profitability of these companies has however suffered during recent years, due to their aggressive investment in L/T growth).


Are Hitachi and Honda Following the Toyota Group's J-QuAD Dynamics JV?

'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

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/363/original/2019-01-11_14-16-49.png?1547292773" class="editor-image img-responsive" data-smartkarma-image-id="75363"></figure>
<p></p>
Source: Japan Analytics</div>
<p style="text-align: left;"><strong>CURRENCY DRIVER</strong> - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including <a href="https://www.smartkarma.com/profiles/381" target="_blank" data-smartkarma-citation="accounts:381">Thomas Schroeder </a> <a href="https://www.smartkarma.com/insights/dollar-yen-big-short-phase-ii" target="_blank" data-smartkarma-citation="insights:27163">here</a> on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/287/original/2019-01-11_14-44-07.png?1547185462" class="editor-image img-responsive" data-smartkarma-image-id="75287"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>¥ &lt; 100</strong> - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/313/original/2019-01-12_10-50-14.png?1547257825" class="editor-image img-responsive" data-smartkarma-image-id="75313"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>EARNINGS DRIVER</strong> - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/319/original/2019-01-12_13-40-19.png?1547268030" class="editor-image img-responsive" data-smartkarma-image-id="75319"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>CURRENCY CORRELATIONS</strong> - In the <strong>DETAIL</strong> below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/318/original/2019-01-12_13-15-40.png?1547266553" class="editor-image img-responsive" data-smartkarma-image-id="75318"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT </strong>- We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.</p>




Source: Japan Analytics
CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder  here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  

Source: Japan Analytics
¥ &lt; 100 - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. 

Source: Japan Analytics
EARNINGS DRIVER - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? 

Source: Japan Analytics
CURRENCY CORRELATIONS - In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).

Source: Japan Analytics
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT - We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.

Japan: What to Buy & Sell if the ¥ Rises to 90

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/11809" target="_blank" data-smartkarma-citation="entities:11809:1">Aisin Seiki (7259 JP)</a> was down 4.5% today following downgrades by Goldman Sachs and Mizuho. This comes after a 16% rally since the middle of Aug that broke the stock out of a small downtrend and we believe it creates an opportunity to buy into the stock.</p><ul>
<li>Ongoing reorganisation within Aisin itself and the Toyota group overall should propel increased investment efficiency and faster response times to opportunities.</li>
<li>Rising demand in China for ATs should propel demand while the attention on EVs discourages competitors from making investments, helping the supply-demand balance and creating an excellent opportunity for Aisin.</li>
<li>1-motor hybrids, eAxles and low-speed autonomous driving systems represent quickly commercialisable technologies to further propel revenue and profit growth.</li>
<li>Valuation multiple trading below historical medians create notable upside.</li>
</ul>

Aisin Seiki (7259 JP) was down 4.5% today following downgrades by Goldman Sachs and Mizuho. This comes after a 16% rally since the middle of Aug that broke the stock out of a small downtrend and we believe it creates an opportunity to buy into the stock.
Ongoing reorganisation within Aisin itself and the Toyota group overall should propel increased investment efficiency and faster response times to opportunities.
Rising demand in China for ATs should propel demand while the attention on EVs discourages competitors from making investments, helping the supply-demand balance and creating an excellent opportunity for Aisin.
1-motor hybrids, eAxles and low-speed autonomous driving systems represent quickly commercialisable technologies to further propel revenue and profit growth.
Valuation multiple trading below historical medians create notable upside.


Aisin Seiki: Reorganisation, Licencing Opportunities Should Boost Margin as ATs Power Revenue Growth

<p>On the 7<sup>th</sup> of September <a href="https://www.smartkarma.com/entities/18703" target="_blank" data-smartkarma-citation="entities:18703:1">Denso Corp (6902 JP)</a> announced that it has agreed with <a href="https://www.smartkarma.com/entities/15895" target="_blank" data-smartkarma-citation="entities:15895:1">Pioneer Corp (6773 JP)</a> to acquire Tohoku Pioneer EG Corporation which is involved in the Factory automation (FA) business. This news is interesting to us following its announcement on the 6th of September about its semiconductor subsidiary NSITEXE, Inc investing in ThinCI Inc. (an AI hardware start-up developing computing platforms). Moreover, towards the end of the previous month, Denso has been quite active agreeing to form a JV with <a href="https://www.smartkarma.com/entities/11809" target="_blank" data-smartkarma-citation="entities:11809:1">Aisin Seiki (7259 JP)</a> , Advics, and <a href="https://www.smartkarma.com/entities/12197" target="_blank" data-smartkarma-citation="entities:12197:1">JTEKT Corp (6473 JP)</a> while also investing in OLED display developer JOLED. In our previous insight ( <a href="https://www.smartkarma.com/insights/denso-raises-stake-in-chip-maker-renesas-a-move-to-accelerate-its-adas-development-further" target="_blank" data-smartkarma-citation="insights:18438">Denso Raises Stake in Chip Maker-Renesas – A Move to Accelerate Its ADAS Development Further</a>) we covered Denso's investment in Renesas. Denso is clearly focusing on investing in next-generation technology companies while also strengthening its other business areas such as FA solutions.</p>

On the 7th of September Denso Corp (6902 JP) announced that it has agreed with Pioneer Corp (6773 JP) to acquire Tohoku Pioneer EG Corporation which is involved in the Factory automation (FA) business. This news is interesting to us following its announcement on the 6th of September about its semiconductor subsidiary NSITEXE, Inc investing in ThinCI Inc. (an AI hardware start-up developing computing platforms). Moreover, towards the end of the previous month, Denso has been quite active agreeing to form a JV with Aisin Seiki (7259 JP) , Advics, and JTEKT Corp (6473 JP) while also investing in OLED display developer JOLED. In our previous insight ( Denso Raises Stake in Chip Maker-Renesas – A Move to Accelerate Its ADAS Development Further) we covered Denso's investment in Renesas. Denso is clearly focusing on investing in next-generation technology companies while also strengthening its other business areas such as FA solutions.

Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI

Japan

JTEKT Corporation manufactures bearings for motor vehicles and electronic equipment.  The Company also produces steering systems and oil seals for automobiles, electronic control units, and machine tools.

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JTEKT Corp (6473 JP)

Showa: Has Been Trading at a Discount to Peers, So Price It Low?

This insight follows our previous insights on the Honda Motor (7267 JP) parts and Hitachi Automotive Systems merger: Hitachi – Thoughts on the...

Aqila Ali

Are Hitachi and Honda Following the Toyota Group's J-QuAD Dynamics JV?

Hitachi Ltd (6501 JP) Hitachi announced that its Automotive Systems company, along with three Honda Motor (7267 JP) Keiretsu Group companies, are...

Aqila Ali

Japan: What to Buy & Sell if the ¥ Rises to 90

CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX...

Campbell Gunn

Aisin Seiki: Reorganisation, Licencing Opportunities Should Boost Margin as ATs Power Revenue Growth

Aisin Seiki (7259 JP) was down 4.5% today following downgrades by Goldman Sachs and Mizuho. This comes after a 16% rally since the middle of Aug...

Mio Kato

Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI

On the 7th of September Denso Corp (6902 JP) announced that it has agreed with Pioneer Corp (6773 JP) to acquire Tohoku Pioneer EG Corporation...

Aqila Ali

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