'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

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/342/original/2020-03-11_11-02-32.png?1583892183" class="editor-image img-responsive" data-smartkarma-image-id="122342"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/590/original/2020-03-12_07-42-03.png?1583966536" class="editor-image img-responsive" data-smartkarma-image-id="122590"></figure><div class="content-caption">Source • Japan Analytics</div>CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds,  we shall look at Cumulative Cash Flows. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual yuho and unaudited quarterly kessan tanshin reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-<ul>
<li>
Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.</li>
<li>
Investing Cash Flow - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.</li>
<li>
Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. </li>
<li>
Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.</li>
<li>
Financing Cash Flow - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.</li>
<li>Change in Cash - Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. </li>
</ul>EXCLUDED - Four companies have been excluded from our review as they have substantial financial subsidiaries - <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/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 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> which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in <a href="https://www.smartkarma.com/entities/japan-display-inc" target="_blank" data-smartkarma-citation="entities:8280:1" rel="noopener">Japan Display (6740 JP).</a><a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a>-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.<div class="content-highlight">In the DETAIL Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. </div>

Source • Japan AnalyticsCUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds,  we shall look at Cumulative Cash Flows. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual yuho and unaudited quarterly kessan tanshin reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-

Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.

Investing Cash Flow - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.

Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. 

Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.

Financing Cash Flow - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.
Change in Cash - Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. 
EXCLUDED - Four companies have been excluded from our review as they have substantial financial subsidiaries - Z Holdings (4689 JP), Rakuten (4755 JP), Sony (6758 JP), Japan Post (6178 JP) which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in Japan Display (6740 JP).Toshiba (6502 JP)-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.In the DETAIL Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. 

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

Equity Analyst, LightStream Research

Supun Walpola

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

In this note, we take a deep dive into <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten Inc (4755 JP)</a>’s domestic e-commerce business.We see a clear difference between how both Rakuten and <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> are pursuing their traditional “goods” e-commerce businesses. Z seems to be still going after user growth, through acquisitions (such as ASKUL and ZOZO) and introduction of newer platforms (such as PayPay Mall and PayPay Flea Market). Rakuten, on the other hand, seems to be focused on monetising its existing users better. One way Rakuten plans to do this is through “in-housing” its merchant deliveries. In 2018, Rakuten introduced the Rakuten Super Logistics service, an end to end supply chain solution for e-commerce users. The service is expected to boost Rakuten’s margins by reducing its reliance on third-party logistics providers and by adding “an extra buck” to revenue through fees charged from both the merchant (through both pickup and warehousing services) and the customer (shipping/delivery costs). However, upfront investments in the logistics network seem to be eating into the e-commerce business bottom line, and by the looks of it, this seems unlikely to recover anytime soon.

In this note, we take a deep dive into Rakuten Inc (4755 JP)’s domestic e-commerce business.We see a clear difference between how both Rakuten and Z Holdings (4689 JP) are pursuing their traditional “goods” e-commerce businesses. Z seems to be still going after user growth, through acquisitions (such as ASKUL and ZOZO) and introduction of newer platforms (such as PayPay Mall and PayPay Flea Market). Rakuten, on the other hand, seems to be focused on monetising its existing users better. One way Rakuten plans to do this is through “in-housing” its merchant deliveries. In 2018, Rakuten introduced the Rakuten Super Logistics service, an end to end supply chain solution for e-commerce users. The service is expected to boost Rakuten’s margins by reducing its reliance on third-party logistics providers and by adding “an extra buck” to revenue through fees charged from both the merchant (through both pickup and warehousing services) and the customer (shipping/delivery costs). However, upfront investments in the logistics network seem to be eating into the e-commerce business bottom line, and by the looks of it, this seems unlikely to recover anytime soon.

Rakuten: Upfront Investments in Logistics and UI/UX Are Eating into E-Commerce Margins

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/121/977/original/2020-03-09_14-29-36.png?1583731808" class="editor-image img-responsive" data-smartkarma-image-id="121977"></figure><div class="content-caption">Source • Stoxx.com</div>ALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy which built on the work of William Beaver and R.A. Fisher. Altman's original article (attached below) was published in the September 1968 issue of the Journal of Finance when he was an assistant professor of finance at NYU Stern.  The 'classic' Z-Score sampled publically-traded manufacturing companies. Later versions were formulated for private companies, non-manufacturing companies and emerging markets.  The model is between 80% and 90% accurate in predicting bankruptcy one year ahead of the event, while the rate of false positives has been between 15% and 20%.APPLICATION TO JAPAN - We have been using Altman Z-Scores in Japan since the mid-1980s. We have found the Scores to be reasonably predictive, as has been confirmed by several academic papers, including  <a href="https://www.semanticscholar.org/paper/A-Model-of-Bankruptcy-Prediction%3A-Calibration-of/5565168f75b578ba28115ef314acbdd387f82483" target="_blank" rel="noopener">Gurau (2013)</a>. The persistence of a large number of 'zombie' companies supported by banks or keiretsu 'relatives' has, however, reduced the overall 'hit' rate for larger listed companies. The following charts show a timeline of the Altman Z-Score and Market Capitalisation for several memorable Japanese corporate bankruptcies. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/005/original/2020-03-09_15-53-11.png?1583736804" class="editor-image img-responsive" data-smartkarma-image-id="122005"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/006/original/2020-03-09_15-54-52.png?1583736903" class="editor-image img-responsive" data-smartkarma-image-id="122006"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/007/original/2020-03-09_15-56-58.png?1583737032" class="editor-image img-responsive" data-smartkarma-image-id="122007"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/009/original/2020-03-09_15-59-08.png?1583737161" class="editor-image img-responsive" data-smartkarma-image-id="122009"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/011/original/2020-03-09_16-03-28.png?1583737425" class="editor-image img-responsive" data-smartkarma-image-id="122011"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-highlight">This Insight is the second part of a three-part series attempting to highlight those Japanese companies that at the highest risk from the 2020 Covid-19 recession. The first focused on the<a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-1-audit-score" target="_blank" data-smartkarma-citation="insights:37265" rel="noopener">Audit Score</a>, while a forthcoming Insight will look at Cumulative Cash Flows.</div>

Source • Stoxx.comALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy which built on the work of William Beaver and R.A. Fisher. Altman's original article (attached below) was published in the September 1968 issue of the Journal of Finance when he was an assistant professor of finance at NYU Stern.  The 'classic' Z-Score sampled publically-traded manufacturing companies. Later versions were formulated for private companies, non-manufacturing companies and emerging markets.  The model is between 80% and 90% accurate in predicting bankruptcy one year ahead of the event, while the rate of false positives has been between 15% and 20%.APPLICATION TO JAPAN - We have been using Altman Z-Scores in Japan since the mid-1980s. We have found the Scores to be reasonably predictive, as has been confirmed by several academic papers, including  Gurau (2013). The persistence of a large number of 'zombie' companies supported by banks or keiretsu 'relatives' has, however, reduced the overall 'hit' rate for larger listed companies. The following charts show a timeline of the Altman Z-Score and Market Capitalisation for several memorable Japanese corporate bankruptcies. Source • Japan AnalyticsThis Insight is the second part of a three-part series attempting to highlight those Japanese companies that at the highest risk from the 2020 Covid-19 recession. The first focused on theAudit Score, while a forthcoming Insight will look at Cumulative Cash Flows.

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Event-Driven

Elliott left Korea, but it didn't go very far. It chose Korea's closest neighbor, Japan, as its next stop. It is now sitting on SoftBank Group with about a 3% stake. Elliott reportedly wants to see a vast improvement in SoftBank's venture investment, the so-called Vision Fund. Well, it is quite understandable and no surprise. Then, what would be an immediate target? Again, unsurprisingly, it is Coupang that is in the limelight at this point. Korea's local street is speculating that Elliott may single out Coupang as an exemplary target of its activism efforts.Of course, we can not know what Elliott demands and how it will exercise its activism muscle on SoftBank and Coupang. It may or may not force SoftBank to completely get out of Coupang by selling off all of its stakes. But what at least seems inevitable is that Elliott will demand a quick and viable liquidation strategy. That is, SoftBank will likely find it extremely difficult to provide another massive capital injection into Coupang. Then, where does Coupang stand in terms of the money situation? Well, it is pretty bad and urgent. Last year again, it reportedly put up a ₩1.4tril operating loss.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/119/974/original/1.png?1582667306" class="editor-image img-responsive" data-smartkarma-image-id="119974"></figure>It got about ₩2.3tril in 2018 from the Vision Fund, but out of that ₩2.3tril, it has already consumed nearly ₩1.4tril. The street estimation is, at the current pace of operating loss, Coupang will completely deplete its capital pool by the third quarter of this year. So, like it or not, SoftBank will have two options left, either say farewell or have it go public. Of course, neither option would be a walk in the park. Finding a buyer in the short-term for a company that is losing like US$1bil a year would be one hell of a job (although the local street speculates about Amazon being as a potential buyer). For a similar reason, IPO on either KOSPI or NASDAQ should also be a very challenging job.So, SoftBank and Coupang need someone from outside for a makeup purpose. Realistically, that makeup would be for IPO. Then, who would that be? Well, the local street has been heavily speculating that Naver would take the role, yes again. We have seen at least three local news reports on the possibility since last December. Lately, a couple of the local brokerages have jumped in to argue on the likelihood of another SoftBank and Naver marriage.

Elliott left Korea, but it didn't go very far. It chose Korea's closest neighbor, Japan, as its next stop. It is now sitting on SoftBank Group with about a 3% stake. Elliott reportedly wants to see a vast improvement in SoftBank's venture investment, the so-called Vision Fund. Well, it is quite understandable and no surprise. Then, what would be an immediate target? Again, unsurprisingly, it is Coupang that is in the limelight at this point. Korea's local street is speculating that Elliott may single out Coupang as an exemplary target of its activism efforts.Of course, we can not know what Elliott demands and how it will exercise its activism muscle on SoftBank and Coupang. It may or may not force SoftBank to completely get out of Coupang by selling off all of its stakes. But what at least seems inevitable is that Elliott will demand a quick and viable liquidation strategy. That is, SoftBank will likely find it extremely difficult to provide another massive capital injection into Coupang. Then, where does Coupang stand in terms of the money situation? Well, it is pretty bad and urgent. Last year again, it reportedly put up a ₩1.4tril operating loss.It got about ₩2.3tril in 2018 from the Vision Fund, but out of that ₩2.3tril, it has already consumed nearly ₩1.4tril. The street estimation is, at the current pace of operating loss, Coupang will completely deplete its capital pool by the third quarter of this year. So, like it or not, SoftBank will have two options left, either say farewell or have it go public. Of course, neither option would be a walk in the park. Finding a buyer in the short-term for a company that is losing like US$1bil a year would be one hell of a job (although the local street speculates about Amazon being as a potential buyer). For a similar reason, IPO on either KOSPI or NASDAQ should also be a very challenging job.So, SoftBank and Coupang need someone from outside for a makeup purpose. Realistically, that makeup would be for IPO. Then, who would that be? Well, the local street has been heavily speculating that Naver would take the role, yes again. We have seen at least three local news reports on the possibility since last December. Lately, a couple of the local brokerages have jumped in to argue on the likelihood of another SoftBank and Naver marriage.

Naver, SoftBank's Savior Again? This Time with Coupang?

Telco/Internet specialist

Kirk Boodry

Redex Research

Rakuten will unveil pricing plans for its facilities-based mobile service on 3 March, with reservations to start on 4 March and the actual service launch sometime in early April.  The current MVNO service offers a starting point on how to evaluate Rakuten's approach whilst incumbent promotional strategies also offer some ideas on what to expect. As we have discussed before, the company's relatively small coverage footprint will constrain discounting as it needs to balance market share expansion with operating losses.  We think Rakuten pricing will focus on simplicity and offer effective discounts of 20-30% over the incumbents today which should be manageable for the incumbents.

Rakuten will unveil pricing plans for its facilities-based mobile service on 3 March, with reservations to start on 4 March and the actual service launch sometime in early April.  The current MVNO service offers a starting point on how to evaluate Rakuten's approach whilst incumbent promotional strategies also offer some ideas on what to expect. As we have discussed before, the company's relatively small coverage footprint will constrain discounting as it needs to balance market share expansion with operating losses.  We think Rakuten pricing will focus on simplicity and offer effective discounts of 20-30% over the incumbents today which should be manageable for the incumbents. 

Japan Mobile: What We Expect when Rakuten Unveils Pricing Next Week

Japan

LY Corporation operates as an internet search engine "Yahoo! JAPAN". The Company provides electronic commerce and settlement finance services for small medium enterprises and individuals. LY also operates media business including search linked advertising and display advertising services.

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LY (4689 JP)

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds, ...

Campbell Gunn

Rakuten: Upfront Investments in Logistics and UI/UX Are Eating into E-Commerce Margins

In this note, we take a deep dive into Rakuten Inc (4755 JP)’s domestic e-commerce business.We see a clear difference between how both Rakuten and...

Supun Walpola

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 2: Altman Z-Score

ALTMAN'S Z-SCORE - Dr Edward Altman's Z-Score has been in use for over 50 years as a statistical model to calculate the probability of bankruptcy...

Campbell Gunn

Naver, SoftBank's Savior Again? This Time with Coupang?

Elliott left Korea, but it didn't go very far. It chose Korea's closest neighbor, Japan, as its next stop. It is now sitting on SoftBank Group with...

Sanghyun Park

Japan Mobile: What We Expect when Rakuten Unveils Pricing Next Week

Rakuten will unveil pricing plans for its facilities-based mobile service on 3 March, with reservations to start on 4 March and the actual service...

Kirk Boodry

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