'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)

<p style="text-align: center;"><strong>• BEST &amp; WORST •</strong></p><p style="text-align: left;">Monday's best and 'worst' pairing is agri-chem company <a href="https://www.smartkarma.com/entities/kumiai-chemical-industry-co" target="_blank" data-smartkarma-citation="entities:12566:1" rel="noopener">Kumiai Chemical (4996 JP)</a> and 'star' grocer <a href="https://www.smartkarma.com/entities/kobe-bussan-co-ltd" target="_blank" data-smartkarma-citation="entities:4701:1" rel="noopener">Kobe Bussan (3038 JP)</a>. Although the latter's results showed positive growth, momentum is fading and the forecasts for FY2021 are, as usual, conservative - as is also the case for the former. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/426/original/2020-12-08_08-05-49.png?1607982021" class="editor-image img-responsive" data-smartkarma-image-id="178426"></figure></section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/427/original/2020-12-15_06-33-56.png?1607982059" class="editor-image img-responsive" data-smartkarma-image-id="178427"></figure></section><div class="content-caption">Source for all charts &amp; tables: Japan Analytics    </div>

• BEST &amp; WORST •Monday's best and 'worst' pairing is agri-chem company Kumiai Chemical (4996 JP) and 'star' grocer Kobe Bussan (3038 JP). Although the latter's results showed positive growth, momentum is fading and the forecasts for FY2021 are, as usual, conservative - as is also the case for the former. Source for all charts &amp; tables: Japan Analytics    

🇯🇵 JAPAN • Results & Revisions 12/​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​14 Kumiai Chem. & Kobe Bussan

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/496/original/2020-06-30_14-16-44.png?1593494217" class="editor-image img-responsive" data-smartkarma-image-id="143496"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<p><strong>THE CASH CONVERSION CYCLE</strong> - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to generate cash and is also known as the Cash Conversion Cycle. In practice, Net Working Capital is scaled by the number of days of Revenue or Cost of Goods Sold that are 'tied' up in three components - Receivables, Inventory, and Payables.</p>
<p><strong>Net Working Capital Days</strong> varies by industry and the lower the number, the better. Amounts over 210 days are excessive, and a sign of business stress.  Net Working Capital is defined as:-</p>
<ul>
<li>
<strong>+ Receivables/Revenue </strong>- the average number of days required to collect on sales. Businesses usually extend a degree of credit to non-cash customers.  Receivables Days over 100 are excessive.</li>
<li>
<strong>+ Inventory/Cost of Goods Sold -</strong> the average number of days it takes to sell out of Inventory. Amounts vary widely by industry but days over 210 are excessive.</li>
<li>- <strong>Payables/Cost of Goods Sold -</strong>the average number of days the company takes to settle transactions with suppliers. By extending nominally interest-free credit, suppliers provide operating leverage to a business. A larger negative number is better, but days less than -100 are excessive.</li>
</ul>
<p>The relationship between Receivables and Payables should also be considered particularly where the company is giving more generous credit terms to its customers than it receives from its suppliers. The Cash Conversion Cycle for the aggregate of all non-financial currently-listed Japanese companies has averaged 77 days over the last thirty years. However, over the previous twelve months., a fourteen-day rise in Inventory Days during the last four years has pushed Net Working Capital Days to 93.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/529/original/2020-06-30_15-09-41.png?1593497395" class="editor-image img-responsive" data-smartkarma-image-id="143529"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/530/original/2020-06-30_15-10-32.png?1593497471" class="editor-image img-responsive" data-smartkarma-image-id="143530"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<div class="content-caption"></div>
<p><strong>NET WORKING CAPITAL DAYS AS A STRESS TEST</strong> - The correlation between Net Working Capital Days and relative performance varies by company and by Sectors. The examples above show how signals can be heeded -  <a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon (7731 JP)</a>, or ignored - <a href="https://www.smartkarma.com/entities/smc-corp" target="_blank" data-smartkarma-citation="entities:20866:1" rel="noopener">SMC (6273 JP)</a> since 2018. (For more on SMC working capital issues, please see my colleague <a href="https://www.smartkarma.com/profiles/scott-foster" target="_blank" data-smartkarma-citation="accounts:1134" rel="noopener">Scott Foster</a>'s Insight of last year - <a href="https://www.smartkarma.com/insights/smc-6273-jp-getting-in-line-with-reality" target="_blank" data-smartkarma-citation="insights:30081" rel="noopener">SMC (6273 JP): Getting in Line with Reality</a>).   </p>
<p>For this Insight, we have limited our review to larger capitalisation manufacturing companies. In the<strong> DETAIL</strong> section below, we shall cover the outliers at both ends of <strong>Receivables Days</strong>, <strong>Inventory Days</strong>, <strong>Payables Days</strong>, and finally <strong>Net Working Capital Days</strong>.</p>


Source • Japan Analytics
THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to generate cash and is also known as the Cash Conversion Cycle. In practice, Net Working Capital is scaled by the number of days of Revenue or Cost of Goods Sold that are 'tied' up in three components - Receivables, Inventory, and Payables.
Net Working Capital Days varies by industry and the lower the number, the better. Amounts over 210 days are excessive, and a sign of business stress.  Net Working Capital is defined as:-


+ Receivables/Revenue - the average number of days required to collect on sales. Businesses usually extend a degree of credit to non-cash customers.  Receivables Days over 100 are excessive.

+ Inventory/Cost of Goods Sold - the average number of days it takes to sell out of Inventory. Amounts vary widely by industry but days over 210 are excessive.
- Payables/Cost of Goods Sold -the average number of days the company takes to settle transactions with suppliers. By extending nominally interest-free credit, suppliers provide operating leverage to a business. A larger negative number is better, but days less than -100 are excessive.

The relationship between Receivables and Payables should also be considered particularly where the company is giving more generous credit terms to its customers than it receives from its suppliers. The Cash Conversion Cycle for the aggregate of all non-financial currently-listed Japanese companies has averaged 77 days over the last thirty years. However, over the previous twelve months., a fourteen-day rise in Inventory Days during the last four years has pushed Net Working Capital Days to 93.


Source • Japan Analytics

NET WORKING CAPITAL DAYS AS A STRESS TEST - The correlation between Net Working Capital Days and relative performance varies by company and by Sectors. The examples above show how signals can be heeded -  Nikon (7731 JP), or ignored - SMC (6273 JP) since 2018. (For more on SMC working capital issues, please see my colleague Scott Foster's Insight of last year - SMC (6273 JP): Getting in Line with Reality).   
For this Insight, we have limited our review to larger capitalisation manufacturing companies. In the DETAIL section below, we shall cover the outliers at both ends of Receivables Days, Inventory Days, Payables Days, and finally Net Working Capital Days.

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Event-Driven

<p>We visited <a href="https://www.smartkarma.com/entities/17345" target="_blank" data-smartkarma-citation="entities:17345:1">Nihon Nohyaku (4997 JP)</a> ("Nichino") this week to discuss the company's longer-term strategy and gain a deeper understanding of its likely positioning within <a href="https://www.smartkarma.com/entities/3122" target="_blank" data-smartkarma-citation="entities:3122:1">Adeka Corp (4401 JP)</a> and future prospects. We came away feeling that there was significant potential for growth but that timelines could try the patience of investors.</p><ul>
<li>Nichino is particularly adept at finding applications for the compounds it develops, taking advantage of its smaller size to develop niche markets that industry majors ignore because they do not move the needle.</li>
<li>The company has a long history of serving global markets and after expanding operations in the US and Europe in FY13/14, the company has begun consolidating subsidiaries in India and Brazil, firmly turning its focus to emerging markets with significant potential.</li>
<li>China's move to allow GMO soybeans dramatically cut the company's royalty revenues which had surged thanks to Bayer leveraging Nichino's Phoenix insecticide in Brazil under the brand name Belt.</li>
<li>Nichino's success licencing Phoenix (Belt) to <a href="https://www.smartkarma.com/entities/26881" target="_blank" data-smartkarma-citation="entities:26881:1">Bayer AG (BAYN GY)</a> appears to have truly whet the company's appetite for emerging markets and it is now focusing on expanding sales there - a key reason for Adeka's investment in the company is to give it the financial muscle to expand and continue R&amp;D.</li>
<li>We expect steady and possibly accelerating growth as the company develops sales in Brazil and India but the company's vision stretches out to 2025 and beyond and much of the potential growth for the company is likely to come towards the end of that time horizon.</li>
<li>Conditions appear to have bottomed and we would expect gradual increases in revenue and OP going forward and multiples are in-line with peers, but industry multiples overall are relatively inflated and could pose some downside risks.</li>
</ul><p>We present our evaluation of longer term prospects and a valuation comparison below.</p>

We visited Nihon Nohyaku (4997 JP) ("Nichino") this week to discuss the company's longer-term strategy and gain a deeper understanding of its likely positioning within Adeka Corp (4401 JP) and future prospects. We came away feeling that there was significant potential for growth but that timelines could try the patience of investors.
Nichino is particularly adept at finding applications for the compounds it develops, taking advantage of its smaller size to develop niche markets that industry majors ignore because they do not move the needle.
The company has a long history of serving global markets and after expanding operations in the US and Europe in FY13/14, the company has begun consolidating subsidiaries in India and Brazil, firmly turning its focus to emerging markets with significant potential.
China's move to allow GMO soybeans dramatically cut the company's royalty revenues which had surged thanks to Bayer leveraging Nichino's Phoenix insecticide in Brazil under the brand name Belt.
Nichino's success licencing Phoenix (Belt) to Bayer AG (BAYN GY) appears to have truly whet the company's appetite for emerging markets and it is now focusing on expanding sales there - a key reason for Adeka's investment in the company is to give it the financial muscle to expand and continue R&amp;D.
We expect steady and possibly accelerating growth as the company develops sales in Brazil and India but the company's vision stretches out to 2025 and beyond and much of the potential growth for the company is likely to come towards the end of that time horizon.
Conditions appear to have bottomed and we would expect gradual increases in revenue and OP going forward and multiples are in-line with peers, but industry multiples overall are relatively inflated and could pose some downside risks.
We present our evaluation of longer term prospects and a valuation comparison below.

Nihon Nohyaku: Adeka Offer Price Seems Full, but Longer-Term Outlook Makes Valuation Fair

Japan

KUMIAI CHEMICAL INDUSTRY Co., Ltd. is a specialized agrochemical manufacturer affiliated with Zenno.  The Company's main products include herbicides, fungicides, and insecticides.  Kumiai Chemical markets its products in North America, Latin America, and Asia.

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Kumiai Chemical Industry Co (4996 JP)

🇯🇵 JAPAN • Results & Revisions 12/14 Kumiai Chem. & Kobe Bussan

Monday's best and 'worst' pairing is agri-chem company Kumiai Chemical (4996 JP) and 'star' grocer Kobe Bussan (3038 JP).

Campbell Gunn

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to...

Campbell Gunn

Nihon Nohyaku: Adeka Offer Price Seems Full, but Longer-Term Outlook Makes Valuation Fair

We visited Nihon Nohyaku (4997 JP) ("Nichino") this week to discuss the company's longer-term strategy and gain a deeper understanding of its...

Mio Kato

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52-week Range

Market Cap (USDm)

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🇯🇵 JAPAN • Results & Revisions 12/​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​14 Kumiai Chem. & Kobe Bussan

Monday's best and 'worst' pairing is agri-chem company Kumiai Chemical (4996 JP) and 'star' grocer Kobe Bussan (3038 JP).

Campbell Gunn

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to...

Campbell Gunn

Nihon Nohyaku: Adeka Offer Price Seems Full, but Longer-Term Outlook Makes Valuation Fair

We visited Nihon Nohyaku (4997 JP) ("Nichino") this week to discuss the company's longer-term strategy and gain a deeper understanding of its...

Mio Kato

🇯🇵 JAPAN • Results & Revisions 12/14 Kumiai Chem. & Kobe Bussan