Equity Analyst, LightStream Research

Oshadhi Kumarasiri

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.

Equity Bottom-Up

Our analysis of Truedata POS sales of FANCL’s Nutritional Supplements business indicates a 23% YoY growth in 1QFY03/20. A big part of this growth came from new products such as Naishi Support and Nyosan Support. The seasoned products such as Calolimit showed signs of a slowdown on a QoQ basis. However, the growth was still positive for Calolimit in YoY terms.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/094/489/original/1.PNG?1564461970" class="editor-image img-responsive" data-smartkarma-image-id="94489"></figure><div class="content-caption">Source: Truedata POS</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/094/490/original/2.PNG?1564461984" class="editor-image img-responsive" data-smartkarma-image-id="94490"></figure><div class="content-caption">Source: Truedata POS</div>We have used our analysis of POS data to forecast the 1QFY03/20 revenues for the Nutritional Supplements business. Our POS data covers about 4% of FANCL’s Nutritional Supplements Business’ domestic revenue, thus improving the reliability of our forecasts. We have used a linear regression to forecast the segment revenues from POS data and it indicates a YoY growth rate in the high-teens range for 1QFY03/20.

Our analysis of Truedata POS sales of FANCL’s Nutritional Supplements business indicates a 23% YoY growth in 1QFY03/20. A big part of this growth came from new products such as Naishi Support and Nyosan Support. The seasoned products such as Calolimit showed signs of a slowdown on a QoQ basis. However, the growth was still positive for Calolimit in YoY terms.Source: Truedata POSSource: Truedata POSWe have used our analysis of POS data to forecast the 1QFY03/20 revenues for the Nutritional Supplements business. Our POS data covers about 4% of FANCL’s Nutritional Supplements Business’ domestic revenue, thus improving the reliability of our forecasts. We have used a linear regression to forecast the segment revenues from POS data and it indicates a YoY growth rate in the high-teens range for 1QFY03/20.

FANCL: Truedata POS Alternative Data Report: Robust Growth in 1QFY03/20 Via New Products

Equity Capital Markets

Shinnihonseiyaku Co Ltd / Equity Capital Markets

Towards the end of May 2019, Shinnihonseiyaku filed for an IPO on the mothers board of the Tokyo stock exchange. The primary offering is very small in this IPO and most of the shares sold through this offering are from the existing shareholders.Based on the given price range for the stock, Shinnihonseiyaku Co.Ltd would be valued in the range of ¥20-23bn in EV, which implies a FY2018 EV/EBIT range of 8.1-9.1x. The multiples seem cheap considering what the peers in the Japanese cosmetics industry are trading at currently and the fact that the returns on capital are higher than the peers makes it attractive on the surface. However, we see significant red flags that may affect the company's returns over the medium to long term.<table class="table table-striped"><tbody>
<tr>
<td>IPO Details</td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td>Book Building</td>
<td colspan="3">From 2019/06/11 to 2019/06/17</td>
</tr>
<tr>
<td>Offer</td>
<td colspan="3">From 2019/06/19 to 2019/06/24</td>
</tr>
<tr>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td>Selling Shareholders</td>
<td>4,570,000</td>
<td></td>
<td></td>
</tr>
<tr>
<td>Overallotment Option</td>
<td>730,000</td>
<td></td>
<td></td>
</tr>
<tr>
<td>New Issue</td>
<td>300,000</td>
<td></td>
<td></td>
</tr>
<tr>
<td>Existing Shares</td>
<td>20,581,300</td>
<td></td>
<td></td>
</tr>
<tr>
<td>Shares Outstanding Post IPO</td>
<td>20,881,300</td>
<td></td>
<td></td>
</tr>
<tr>
<td></td>
<td>Low</td>
<td>High</td>
<td></td>
</tr>
<tr>
<td>Price Range</td>
<td>1,350</td>
<td>1,470</td>
<td></td>
</tr>
<tr>
<td>Expected Market Cap - in ¥m</td>
<td>28,190</td>
<td>30,696</td>
<td></td>
</tr>
<tr>
<td>Expected EV - in ¥m</td>
<td>20,121</td>
<td>22,596</td>
<td></td>
</tr>
<tr><td colspan="4">*based on March 2019 debt and cash and IPO proceeds</td></tr>
<tr>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td>Implied Multiples- FY2018 </td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td>EV/Sales</td>
<td>0.6x</td>
<td>0.7x</td>
<td></td>
</tr>
<tr>
<td>EV/EBIT</td>
<td>8.1x</td>
<td>9.1x</td>
<td></td>
</tr>
<tr>
<td>P/E</td>
<td>16.1x</td>
<td>17.5x</td>
<td></td>
</tr>
</tbody></table>Source: Company Disclosures

Towards the end of May 2019, Shinnihonseiyaku filed for an IPO on the mothers board of the Tokyo stock exchange. The primary offering is very small in this IPO and most of the shares sold through this offering are from the existing shareholders.Based on the given price range for the stock, Shinnihonseiyaku Co.Ltd would be valued in the range of ¥20-23bn in EV, which implies a FY2018 EV/EBIT range of 8.1-9.1x. The multiples seem cheap considering what the peers in the Japanese cosmetics industry are trading at currently and the fact that the returns on capital are higher than the peers makes it attractive on the surface. However, we see significant red flags that may affect the company's returns over the medium to long term.

IPO Details





Book Building
From 2019/06/11 to 2019/06/17


Offer
From 2019/06/19 to 2019/06/24








Selling Shareholders
4,570,000




Overallotment Option
730,000




New Issue
300,000




Existing Shares
20,581,300




Shares Outstanding Post IPO
20,881,300





Low
High



Price Range
1,350
1,470



Expected Market Cap - in ¥m
28,190
30,696



Expected EV - in ¥m
20,121
22,596


*based on March 2019 debt and cash and IPO proceeds







Implied Multiples- FY2018 





EV/Sales
0.6x
0.7x



EV/EBIT
8.1x
9.1x



P/E
16.1x
17.5x


Source: Company Disclosures

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

'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/000/088/401/original/2019-05-21_15-51-33.png?1558421503" class="editor-image img-responsive" data-smartkarma-image-id="88401"></figure>Source: Japan Analytics
</div>SECOND DOWN QUARTER - This Insight will review the aggregate results for the 3765 listed Japanese companies as of 20th May 2019 for which there are at least four reported quarters. We shall also cover our updated Results &amp; Revision Scores for the Market Composite and each of our 30 Sectors. Having declined by 2.50% in the 'winter' quarter reported Operating Income fell by another 0.96%. The declines in Net Income were 8.04% and 4.93%, respectively. Aggregate Net Income is now at the same level as in February 2018.NOT THAT 'CONSERVATIVE' - For most companies, the 'spring' quarter marks the end of the fiscal year and is accompanied by the release of forecasts for the current year ending March 2020.  The normal sell-side 'mantra' is that such forecasts are always 'conservative'. In light of current economic conditions (imports -17.2% qoq annualised) and the outlook global trade, we consider the 2020 forecasts to be relatively optimistic. Operating Income is expected to rise by 0.5% compared to last quarter and by 2.6% relative to the trailing-twelve-month (TTM) results. Forecast Net Income is unchanged from last quarter but is 4% above TTM. NO LONGER 'CHEAP' - As a result of the weaker TTM results, the market multiple has risen to close to 15 times and the market is no longer the bargain it reached on Christmas Day. The upside to a 'normal' market multiple (16.7) is now only 11%, or the market is implying that Net Income has to fall by a similar amount.   <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/088/408/original/2019-05-21_16-29-55.png?1558423805" class="editor-image img-responsive" data-smartkarma-image-id="88408"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/088/411/original/2019-05-21_16-39-58.png?1558424413" class="editor-image img-responsive" data-smartkarma-image-id="88411"></figure><div class="content-caption">Source: Japan Analytics</div>ROLLING TTMs AND PEAKING MARGINS - Our series of rolling trailing-twelve-month (TTM) quarterly aggregates of all listed companies confirm the profit peak. Revenues are still increasing by 5% a year; however, the rolling quarterly rate of increase is slowing. The 2% Revenue growth forecast for this year appears optimistic. Operating Income declined by 0.9% qoq in the quarter just declared which was forecast to be flat. TTM Operating Income is now lower than in any of the last five quarters. As noted above, the forecast is for 2.6% growth this fiscal year. Operating margins peaked at 7.78% one year ago and have declined by 45 basis points since then. They are forecast to remain at current levels this year.  TTM Net Margins (not shown above) are now 5.02% having fallen 83 basis points in the last two quarters. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/088/418/original/2019-05-21_17-16-38.png?1558426621" class="editor-image img-responsive" data-smartkarma-image-id="88418"></figure><div class="content-caption">Source: Japan Analytics</div>RESULT &amp; REVISION SCORE FLATTENS OUT - Our Results &amp; Revision Score - details on the methodology are provided below - has a better correlation (0.80) with the market than the TTM results (0.70) and, as it includes elements of momentum, is often an excellent leading indicator. The detailed breakdown between the three components (Results, Annual Forecast/Revision, Interim Forecast/Revision) is provided below, however, the improvement in Annual Forecast/Revision  Score was sufficient to offset declines in the other two components and produced the most significant increase (+22%) in the Score since November 2017.SECOND HALF RECOVERY? - We had expected the Score to be negative by this month and for the upturn to be in late 2019. Although the now-negative Interim Forecast/Revision Score suggests further weakness ahead, Japanese corporates are collectively signalling a strong recovery in the second half. In the DETAIL section below we shall examine the trends in earnings results and forecasts for the 30 sectors that make up our Market Composite and look at the breakdown of the Market Composite Results &amp; Revision Score and our 30 Sector Scores.


Source: Japan Analytics
SECOND DOWN QUARTER - This Insight will review the aggregate results for the 3765 listed Japanese companies as of 20th May 2019 for which there are at least four reported quarters. We shall also cover our updated Results &amp; Revision Scores for the Market Composite and each of our 30 Sectors. Having declined by 2.50% in the 'winter' quarter reported Operating Income fell by another 0.96%. The declines in Net Income were 8.04% and 4.93%, respectively. Aggregate Net Income is now at the same level as in February 2018.NOT THAT 'CONSERVATIVE' - For most companies, the 'spring' quarter marks the end of the fiscal year and is accompanied by the release of forecasts for the current year ending March 2020.  The normal sell-side 'mantra' is that such forecasts are always 'conservative'. In light of current economic conditions (imports -17.2% qoq annualised) and the outlook global trade, we consider the 2020 forecasts to be relatively optimistic. Operating Income is expected to rise by 0.5% compared to last quarter and by 2.6% relative to the trailing-twelve-month (TTM) results. Forecast Net Income is unchanged from last quarter but is 4% above TTM. NO LONGER 'CHEAP' - As a result of the weaker TTM results, the market multiple has risen to close to 15 times and the market is no longer the bargain it reached on Christmas Day. The upside to a 'normal' market multiple (16.7) is now only 11%, or the market is implying that Net Income has to fall by a similar amount.   Source: Japan AnalyticsROLLING TTMs AND PEAKING MARGINS - Our series of rolling trailing-twelve-month (TTM) quarterly aggregates of all listed companies confirm the profit peak. Revenues are still increasing by 5% a year; however, the rolling quarterly rate of increase is slowing. The 2% Revenue growth forecast for this year appears optimistic. Operating Income declined by 0.9% qoq in the quarter just declared which was forecast to be flat. TTM Operating Income is now lower than in any of the last five quarters. As noted above, the forecast is for 2.6% growth this fiscal year. Operating margins peaked at 7.78% one year ago and have declined by 45 basis points since then. They are forecast to remain at current levels this year.  TTM Net Margins (not shown above) are now 5.02% having fallen 83 basis points in the last two quarters. Source: Japan AnalyticsRESULT &amp; REVISION SCORE FLATTENS OUT - Our Results &amp; Revision Score - details on the methodology are provided below - has a better correlation (0.80) with the market than the TTM results (0.70) and, as it includes elements of momentum, is often an excellent leading indicator. The detailed breakdown between the three components (Results, Annual Forecast/Revision, Interim Forecast/Revision) is provided below, however, the improvement in Annual Forecast/Revision  Score was sufficient to offset declines in the other two components and produced the most significant increase (+22%) in the Score since November 2017.SECOND HALF RECOVERY? - We had expected the Score to be negative by this month and for the upturn to be in late 2019. Although the now-negative Interim Forecast/Revision Score suggests further weakness ahead, Japanese corporates are collectively signalling a strong recovery in the second half. In the DETAIL section below we shall examine the trends in earnings results and forecasts for the 30 sectors that make up our Market Composite and look at the breakdown of the Market Composite Results &amp; Revision Score and our 30 Sector Scores.

🇯🇵 JAPAN • Spring Results & Revisions - Market  & Sector Aggregates & Scores - 2nd▼Quarter

FANCL Corporation’s share price gained more than 25% over the last 3 months on the back of the positivity surrounding the Japanese cosmetics industry. The stock may not look cheap at over 30x Forward PE, but considering its long-term growth prospects we are very optimistic about FANCL in the long run.
In our previous insight: <a href="https://www.smartkarma.com/insights/fancl-playing-the-long-game" target="_blank">FANCL: Playing the Long Game</a> we, covered the stock on a traditional investment research angle. In that we expected the company to outperform the competition in the long run. Now we take a more novel approach using alternative data to analyse FANCL’s short to medium term prospects. The results are as good and therefore we maintain our positive view on FANCL prior to the release of their FY03/19 results which is due on the 25th of April 2019.
<ul>
<li>
Consensus estimates reversions on the back of weak inbound sales and maturing Calolimit and Enkin
<ul>
<li>Calolimit – POS data analysis</li>
<li>Enkin – POS data analysis</li>
</ul>
</li>
<li>
Rest of supplements business and cosmetics steady growth- Doesn’t justify estimate reversions 
<ul>
<li>Naishi Support – POS data analysis</li>
<li>Cosmetics expected to grow 8% YoY in 4QFY03/19</li>
</ul>
</li>
<li>FANCL to beat FY03/19 guidance and consensus estimates</li>
<li>We expect even stronger performance in FY03/20</li>
</ul>

FANCL Corporation’s share price gained more than 25% over the last 3 months on the back of the positivity surrounding the Japanese cosmetics industry. The stock may not look cheap at over 30x Forward PE, but considering its long-term growth prospects we are very optimistic about FANCL in the long run.
In our previous insight: FANCL: Playing the Long Game we, covered the stock on a traditional investment research angle. In that we expected the company to outperform the competition in the long run. Now we take a more novel approach using alternative data to analyse FANCL’s short to medium term prospects. The results are as good and therefore we maintain our positive view on FANCL prior to the release of their FY03/19 results which is due on the 25th of April 2019.


Consensus estimates reversions on the back of weak inbound sales and maturing Calolimit and Enkin

Calolimit – POS data analysis
Enkin – POS data analysis



Rest of supplements business and cosmetics steady growth- Doesn’t justify estimate reversions 

Naishi Support – POS data analysis
Cosmetics expected to grow 8% YoY in 4QFY03/19


FANCL to beat FY03/19 guidance and consensus estimates
We expect even stronger performance in FY03/20


FANCL Corporation: What to Expect in FY03/19 Results and Beyond

Thematic (Sector/Industry)

A disappointing January saw almost all the Japanese cosmetic companies face dropping share price. In the meantime, the Nikkei index managed to increase by about 6%. FANCL was the biggest loser among cosmetics in January 2019, as the share price tumbled more than 11% during the month. Shiseido, Kose and Kao all saw their share prices decline during 2019 while Pola Orbis was the only Japanese cosmetics accompany that saw its share price rise during January 2019.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/478/original/1.jpg?1555906777" class="editor-image img-responsive" data-smartkarma-image-id="85478"></figure>
<div class="content-caption">Source: Cap IQ</div>
Since the lows of January, Japanese cosmetic stocks have rallied and to date have returned about 30% for investors. Kose, Shiseido and FANCL were the biggest winners as all three companies managed to generate more than 25% upside since their January lows. Other Japanese cosmetics companies also managed to outperform the Nikkei during the months of February, March and April.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/479/original/2.jpg?1555906818" class="editor-image img-responsive" data-smartkarma-image-id="85479"></figure>
<div class="content-caption">Source: Cap IQ</div>

A disappointing January saw almost all the Japanese cosmetic companies face dropping share price. In the meantime, the Nikkei index managed to increase by about 6%. FANCL was the biggest loser among cosmetics in January 2019, as the share price tumbled more than 11% during the month. Shiseido, Kose and Kao all saw their share prices decline during 2019 while Pola Orbis was the only Japanese cosmetics accompany that saw its share price rise during January 2019.

Source: Cap IQ
Since the lows of January, Japanese cosmetic stocks have rallied and to date have returned about 30% for investors. Kose, Shiseido and FANCL were the biggest winners as all three companies managed to generate more than 25% upside since their January lows. Other Japanese cosmetics companies also managed to outperform the Nikkei during the months of February, March and April.

Source: Cap IQ

Japan Cosmetic: FANCL, KOSE, Shiseido & Pola Orbis Making Progress as Worries of Weak January Fades

Japan

KOSE Corporation manufactures, retails, and exports cosmetics including make up, skin care, and hair care products.  The Company sells its products in Hong Kong, China, Singapore, and Malaysia.

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Kose Corp (4922 JP)

FANCL: Truedata POS Alternative Data Report: Robust Growth in 1QFY03/20 Via New Products

Our analysis of Truedata POS sales of FANCL’s Nutritional Supplements business indicates a 23% YoY growth in 1QFY03/20. A big part of this growth...

Oshadhi Kumarasiri

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

Towards the end of May 2019, Shinnihonseiyaku filed for an IPO on the mothers board of the Tokyo stock exchange. The primary offering is very small...

Oshadhi Kumarasiri

🇯🇵 JAPAN • Spring Results & Revisions - Market & Sector Aggregates & Scores - 2nd▼Quarter

SECOND DOWN QUARTER - This Insight will review the aggregate results for the 3765 listed Japanese companies as of 20th May 2019 for which there are...

Campbell Gunn

FANCL Corporation: What to Expect in FY03/19 Results and Beyond

FANCL Corporation’s share price gained more than 25% over the last 3 months on the back of the positivity surrounding the Japanese cosmetics...

Oshadhi Kumarasiri

Japan Cosmetic: FANCL, KOSE, Shiseido & Pola Orbis Making Progress as Worries of Weak January Fades

A disappointing January saw almost all the Japanese cosmetic companies face dropping share price. In the meantime, the Nikkei index managed to...

Oshadhi Kumarasiri

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