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.

Event-Driven

<p><a href="https://www.bloomberg.com/news/articles/2020-11-16/ghosn-s-grand-alliance-showing-cracks-two-years-after-his-arrest" target="_blank" rel="noopener">Bloomberg reported</a> today that Nissan is exploring the possibility of selling some or all of its stake in junior alliance partner Mitsubishi Motors. We had previously highlighted <a href="https://www.smartkarma.com/insights/nissan-two-strikes-for-the-alliance-and-a-zero-dividend" target="_blank" rel="noopener">the struggles of the alliance members</a> even relative to their peers and this stress appears to be putting increased pressure on the alliance itself. While this rumour guarantees nothing, we believe the continued earnings weakness from the alliance members increases rather than decreases the chance of a breakup.</p>

Bloomberg reported today that Nissan is exploring the possibility of selling some or all of its stake in junior alliance partner Mitsubishi Motors. We had previously highlighted the struggles of the alliance members even relative to their peers and this stress appears to be putting increased pressure on the alliance itself. While this rumour guarantees nothing, we believe the continued earnings weakness from the alliance members increases rather than decreases the chance of a breakup.

Mitsubishi Motors – Rumoured Stake Sale by Nissan Will Renew Alliance Breakup Concerns

Equity Bottom-Up

<p>Mitsubishi Motors reported its 2QFY03/2021 results on Wednesday with revenue at ¥345.3bn (-42% YoY) and an operating loss of ¥29.3bn (for an OPM of -8.5% compared to the OPM of 1.1% in 2QFY03/20). However, while reported revenue was 7.8% lower than consensus estimates the operating loss was smaller than consensus projections of a ¥30.7bn loss. </p>

Mitsubishi Motors reported its 2QFY03/2021 results on Wednesday with revenue at ¥345.3bn (-42% YoY) and an operating loss of ¥29.3bn (for an OPM of -8.5% compared to the OPM of 1.1% in 2QFY03/20). However, while reported revenue was 7.8% lower than consensus estimates the operating loss was smaller than consensus projections of a ¥30.7bn loss. 

Mitsubishi Motors – Struggling Despite Rising Tide

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/586/original/2020-09-02_15-03-28.png?1599026640" class="editor-image img-responsive" data-smartkarma-image-id="156586"></figure>
<div class="content-caption">Source for all charts: Japan Analytics</div>
<p><strong>NEV IN JAPAN</strong> - Japan has a reputation for being the world's leading market for finding listed companies with negative Enterprise Value (NEV). Based on a sample of 842,133 traded months for the 3,826 currently-listed non-financial companies in our universe since 1993, NEV-traded months represent 8%. One thousand and eleven companies have spent at least one month with a negative EV and the average NEV 'period' is just over two years.  The number of NEV companies has varied over the last thirty years, from only one in 1994 (Sanyu Construction 1841 JP) to a peak of 437 in 2009 - 15.4% of the universe. In the last two years, the percentage has doubled to 10% or 366 companies, most of which are small-cap.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/590/original/2020-09-02_15-13-33.png?1599027223" class="editor-image img-responsive" data-smartkarma-image-id="156590"></figure>
<p><strong>50 BPS</strong> -Accordingly, the aggregate (inverted) value of NEV stocks is ¥2.5 trillion or just 50 basis points of the aggregate of the universe. Nevertheless, the current value is at the upper end of the thirty-year range. We have excluded four non-financial companies - Z Holdings, Rakuten, Japan Post, and Sony - as they have financial subsidiaries on their balance sheets.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/595/original/2020-09-02_15-36-40.png?1599028611" class="editor-image img-responsive" data-smartkarma-image-id="156595"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/866/original/2020-09-03_16-43-25.png?1599119017" class="editor-image img-responsive" data-smartkarma-image-id="156866"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/596/original/2020-09-02_15-37-56.png?1599028687" class="editor-image img-responsive" data-smartkarma-image-id="156596"></figure>
<p><strong>NEV 'BUYS'</strong> - Brief periods, and occasionally extended, when higher-quality companies dip into NEV are often good long-term buying opportunities as shown above with <a href="https://www.smartkarma.com/entities/temp-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:1428:1" rel="noopener">Persol (2181 JP)</a>, <a href="https://www.smartkarma.com/entities/toei-animation-co-ltd" target="_blank" data-smartkarma-citation="entities:18641:1" rel="noopener">Toei Animation (4816 JP)</a>  and <a href="https://www.smartkarma.com/entities/hakuhodo-dy-holdings-inc" target="_blank" data-smartkarma-citation="entities:8736:1" rel="noopener">Hakuhodo DY (2433 JP)</a>. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/623/original/2020-09-02_17-57-38.png?1599037069" class="editor-image img-responsive" data-smartkarma-image-id="156623"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/625/original/2020-09-02_18-04-05.png?1599037457" class="editor-image img-responsive" data-smartkarma-image-id="156625"></figure>
<p><strong>NEV 'TRAPS'</strong> - Conversely, NEV can persist for years, 'trapping' both value investors and activists, particularly where management remain 'cloth-eared' such as <a href="https://www.smartkarma.com/entities/tokyo-broadcasting-system" target="_blank" data-smartkarma-citation="entities:12981:1" rel="noopener">Tokyo Broadcasting System (9401 JP)</a> and <a href="https://www.smartkarma.com/entities/toppan-printing-co-ltd" target="_blank" data-smartkarma-citation="entities:11875:1" rel="noopener">Toppan Printing (7911 JP).</a></p>
<div class="content-highlight">
<p>In the <strong>DETAIL</strong> section below, we will review the current large-cap NEV companies, as well the most persistent and the largest peak to trough NEV ranges and make some specific stock recommendations.</p>
</div>


Source for all charts: Japan Analytics
NEV IN JAPAN - Japan has a reputation for being the world's leading market for finding listed companies with negative Enterprise Value (NEV). Based on a sample of 842,133 traded months for the 3,826 currently-listed non-financial companies in our universe since 1993, NEV-traded months represent 8%. One thousand and eleven companies have spent at least one month with a negative EV and the average NEV 'period' is just over two years.  The number of NEV companies has varied over the last thirty years, from only one in 1994 (Sanyu Construction 1841 JP) to a peak of 437 in 2009 - 15.4% of the universe. In the last two years, the percentage has doubled to 10% or 366 companies, most of which are small-cap.

50 BPS -Accordingly, the aggregate (inverted) value of NEV stocks is ¥2.5 trillion or just 50 basis points of the aggregate of the universe. Nevertheless, the current value is at the upper end of the thirty-year range. We have excluded four non-financial companies - Z Holdings, Rakuten, Japan Post, and Sony - as they have financial subsidiaries on their balance sheets.



NEV 'BUYS' - Brief periods, and occasionally extended, when higher-quality companies dip into NEV are often good long-term buying opportunities as shown above with Persol (2181 JP), Toei Animation (4816 JP)  and Hakuhodo DY (2433 JP). 


NEV 'TRAPS' - Conversely, NEV can persist for years, 'trapping' both value investors and activists, particularly where management remain 'cloth-eared' such as Tokyo Broadcasting System (9401 JP) and Toppan Printing (7911 JP).

In the DETAIL section below, we will review the current large-cap NEV companies, as well the most persistent and the largest peak to trough NEV ranges and make some specific stock recommendations.


🇯🇵 JAPAN • Looking for Value in Negative Enterprise Value

<p>The <a href="https://www.ft.com/content/89efb01d-b5f9-427b-b779-b118cd4383f0" target="_blank" rel="noopener">FT has an article</a> out saying that the Japanese government had directed some initial feelers towards Honda and Nissan raising the possibility of a merger between the two companies. This is not especially surprising to us and we had touted the possibility earlier this year as being more plausible than it would appear on the surface. According to the FT, the idea was rather roundly shot down by both sides. This too is not particularly surprising, but we believe that while now is not the ideal time for a merger, it is one of the few options which could help the companies regain vigour… if done correctly, which will be difficult.</p>

The FT has an article out saying that the Japanese government had directed some initial feelers towards Honda and Nissan raising the possibility of a merger between the two companies. This is not especially surprising to us and we had touted the possibility earlier this year as being more plausible than it would appear on the surface. According to the FT, the idea was rather roundly shot down by both sides. This too is not particularly surprising, but we believe that while now is not the ideal time for a merger, it is one of the few options which could help the companies regain vigour… if done correctly, which will be difficult.

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/266/original/2020-07-28_06-42-44.png?1595886197" class="editor-image img-responsive" data-smartkarma-image-id="148266"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/267/original/2020-07-28_06-47-55.png?1595886499" class="editor-image img-responsive" data-smartkarma-image-id="148267"></figure><div class="content-caption">Source • Japan Analytics</div>
<p><a href="https://www.smartkarma.com/entities/koei-tecmo-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:20277:1" rel="noopener">Koei Tecmo (3635 JP)</a> - Koei Tecmo produced the most-improved Results Score among large-cap companies yesterday. Colleague <a href="https://www.smartkarma.com/profiles/mio-kato-cfa" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a>'s April Insight<a href="https://www.smartkarma.com/insights/koei-tecmo-plenty-of-headroom-to-play-with" target="_blank" data-smartkarma-citation="insights:38880" rel="noopener"> Plenty of Headroom to Play With</a> called this correctly - <em>"the strength of Sangokushi Senryaku Ban and a strong game pipeline should help the company continue to outperform significantly."</em> The shares are now Overbought, and the valuation has never been as extreme. A Results Score of 30 is 'perfection'. We would trim into any results-induced move above ¥3,500.</p>
<p style="text-align: center;"><strong>DAILY STATS</strong></p>
</div><hr><div><p style="text-align: center;"><strong>40 Quarterly Results</strong></p></div><div><ul>
<li>
<strong>Results Score:</strong> 14 Positive / 0 Neutral / 26 Negative</li>
<li>
<strong>Average Results Score Change: -</strong>3.3</li>
<li>
<strong>Average % Change in Revenue:</strong> -10.6% Quarter YoY / -3.0% Rolling TTM YoY </li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -1.1ppt</li>
<li>
<strong>Percentage Making Quarterly Losses:</strong> 18%</li>
</ul></div><hr><div><p style="text-align: center;"><br><strong>19 Annual • 12 Interim Forecasts/Revisions</strong></p></div><div><ul>
<li>
<strong>Annual Forecast/Revision Score:</strong> 6 Positive / 0 Neutral / 13 Negative</li>
<li>
<strong>Interim Forecast/Revision Score Change:</strong> 2 Positive / 0 Neutral / 10 Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -11.5</li>
</ul></div>


Source • Japan Analytics
Koei Tecmo (3635 JP) - Koei Tecmo produced the most-improved Results Score among large-cap companies yesterday. Colleague Mio Kato's April Insight Plenty of Headroom to Play With called this correctly - "the strength of Sangokushi Senryaku Ban and a strong game pipeline should help the company continue to outperform significantly." The shares are now Overbought, and the valuation has never been as extreme. A Results Score of 30 is 'perfection'. We would trim into any results-induced move above ¥3,500.
DAILY STATS
40 Quarterly Results

Results Score: 14 Positive / 0 Neutral / 26 Negative

Average Results Score Change: -3.3

Average % Change in Revenue: -10.6% Quarter YoY / -3.0% Rolling TTM YoY 

Average Operating Profit Margin Change: -1.1ppt

Percentage Making Quarterly Losses: 18%
 19 Annual • 12 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 6 Positive / 0 Neutral / 13 Negative

Interim Forecast/Revision Score Change: 2 Positive / 0 Neutral / 10 Negative

Average Forecast/Revision Score Change: -11.5


🇯🇵 JAPAN • Results & Revisions 27th July - Koei Tecmo, Nitto Denko, MMC, Stanley Electric, Exedy

Japan

MITSUBISHI MOTORS CORPORATION develops and manufactures passenger cars and its related parts.  The Company has production facilities in Japan, the US, and Thailand.  Mitsubishi Motors Corp provides vehicle-related financing and leasing service through its subsidiary.

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Mitsubishi Motors (7211 JP)

Mitsubishi Motors – Rumoured Stake Sale by Nissan Will Renew Alliance Breakup Concerns

We examine potential buyers in the instance that reports about Nissan looking to sell its stake in Mitsubishi Motors turn out to be true, also...

Mio Kato

Mitsubishi Motors – Struggling Despite Rising Tide

Mitsubishi Motors continues to struggle despite an accelerating recovery in the auto sector as it sees weak volumes in the strong Chinese market....

Mio Kato

🇯🇵 JAPAN • Looking for Value in Negative Enterprise Value

NEV IN JAPAN - Japan has a reputation for being the world's leading market for finding listed companies with negative Enterprise Value (NEV)....

Campbell Gunn

Revisiting Our Nissan-Honda Merger Idea

The FT has an article out saying that the Japanese government had directed some initial feelers towards Honda and Nissan raising the possibility of...

Mio Kato

🇯🇵 JAPAN • Results & Revisions 27th July - Koei Tecmo, Nitto Denko, MMC, Stanley Electric, Exedy

Koei Tecmo (3635 JP) - Koei Tecmo produced the most-improved Results Score among large-cap companies yesterday. Colleague Mio Kato's April...

Campbell Gunn

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