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

After its share price lost two thirds of its value over the last year <a href="https://www.smartkarma.com/entities/15933" target="_blank" data-smartkarma-citation="entities:15933:1">Renesas Electronics (6723 JP)</a> is surging today after a <a href="https://www.nikkei.com/nkd/company/article/?ba=1&amp;ng=DGXMZO37104840Q8A031C1000000&amp;scode=6723" target="_blank">positive interview with its CEO Bunsei Kure was published in the Nikkei</a> this morning (Japanese only). This article does have the faint whiff of a puff piece and even has the CEO directly suggesting that the share price seemed cheap relative to competitors. This is a somewhat uncommon statement coming from Japanese management and indicates some concern regarding the situation. A likely reason prompting this in-depth interview delving into the company's recent M&amp;A activity, potential synergies and its outlook for the future.While the share price move feels a little strong given the lack of concrete catalysts mentioned, we believe the article illustrates the positives for Renesas well and also hints at the CEO's understanding of international M&amp;A, gained at <a href="https://www.smartkarma.com/entities/7245" target="_blank" data-smartkarma-citation="entities:7245:1">Nidec Corp (6594 JP)</a> no less.

After its share price lost two thirds of its value over the last year Renesas Electronics (6723 JP) is surging today after a positive interview with its CEO Bunsei Kure was published in the Nikkei this morning (Japanese only). This article does have the faint whiff of a puff piece and even has the CEO directly suggesting that the share price seemed cheap relative to competitors. This is a somewhat uncommon statement coming from Japanese management and indicates some concern regarding the situation. A likely reason prompting this in-depth interview delving into the company's recent M&amp;A activity, potential synergies and its outlook for the future.While the share price move feels a little strong given the lack of concrete catalysts mentioned, we believe the article illustrates the positives for Renesas well and also hints at the CEO's understanding of international M&amp;A, gained at Nidec Corp (6594 JP) no less.

Renesas: Surges 10% on Positive Nikkei Interview with CEO Suggests Solid M&A Knowhow

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

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. 

Equity Bottom-Up

Like its customer, silicon wafer producer SUMCO (3436 JP), Fujimi is geared primarily to silicon wafer demand, which remains strong. Nevertheless, its share price, like that of SUMCO, has declined markedly in recent months. We regard this as a buying opportunity. As of the Friday November 30 close, Fujimi was down 25.5% from its August high of ¥3,270. But operating profit was up 22.9% year-on-year on a 10.0% increase in sales in the six months to September, exceeding guidance, and management has raised guidance for FY Mar-19 as a whole. We believe the new full-year guidance, which is for an 8.8% increase in operating profit on a 4.8% increase in sales, is also conservative, and we expect growth to continue in FY Mar-20.As noted by William Keating in <a href="https://www.smartkarma.com/insights/semiconductor-silicon-wafers-global-supply-demand-pricing-review-q2-2018" target="_blank" data-smartkarma-citation="insights:22163">Semiconductor Silicon Wafers- Global Supply, Demand &amp; Pricing Review Q2 2018</a>:<div class="content-highlight">"2018 has seen little change in either the demand, supply or pricing outlook. If anything, supply looks to be falling further behind demand as wafer inventories continue to diminish and prices look set for additional increases of around 20% by the end of the year. Furthermore, the planned capacity increases scheduled to come online in 2019 are unlikely to be sufficient in view of continued strong secular demand growth drivers, all strongly suggesting a continuation of the status quo through 2020."</div>And, as noted by Mio Kato in <a href="https://www.smartkarma.com/insights/sumco-recovery-in-silicon-wafer-prices-fuel-growth-unwarranted-60-price-fall-creates-entry-point" target="_blank" data-smartkarma-citation="insights:25854">Sumco: Recovery in Silicon Wafer Prices Fuel Growth; Unwarranted 60% Price Fall Creates Entry Point</a>:<div class="content-highlight">"The company expects to see the current strong demand for 300mm wafers and 200mm wafers to continue into the medium-term. After suffering from years of oversupply and price declines, the market is currently going through constraints in wafer supply which has resulted in hikes in prices. We agree with the company’s view that 300mm wafer demand should grow through 2020..."</div>At ¥2,436, Fujimi shares are selling at 13.6x our EPS estimate for this fiscal year and 13.1x our estimate for FY Mar-20. These multiples compare with an historical range of 9.1x to 23.9x in the past three fiscal years. <div class="content-highlight">Fujimi is a leading supplier of synthetic precision abrasive powders and slurries used in the lapping (removal of surface defects and thinning) and polishing of silicon wafers and other semiconductor substrates, the chemical mechanical planarization (CMP) of processed semiconductor wafers, and the polishing of computer hard disks. It has close to 90% of the global market for silicon wafer lapping and polishing abrasives and 8% of the fragmented market for CMP slurries. Customers include SUMCO, Shin-Etsu, Samsung Electronics, Intel, Micron, Global Foundries, TSMC, UMC, Western Digital, and mobile display makers in China. </div>

Like its customer, silicon wafer producer SUMCO (3436 JP), Fujimi is geared primarily to silicon wafer demand, which remains strong. Nevertheless, its share price, like that of SUMCO, has declined markedly in recent months. We regard this as a buying opportunity. As of the Friday November 30 close, Fujimi was down 25.5% from its August high of ¥3,270. But operating profit was up 22.9% year-on-year on a 10.0% increase in sales in the six months to September, exceeding guidance, and management has raised guidance for FY Mar-19 as a whole. We believe the new full-year guidance, which is for an 8.8% increase in operating profit on a 4.8% increase in sales, is also conservative, and we expect growth to continue in FY Mar-20.As noted by William Keating in Semiconductor Silicon Wafers- Global Supply, Demand &amp; Pricing Review Q2 2018:"2018 has seen little change in either the demand, supply or pricing outlook. If anything, supply looks to be falling further behind demand as wafer inventories continue to diminish and prices look set for additional increases of around 20% by the end of the year. Furthermore, the planned capacity increases scheduled to come online in 2019 are unlikely to be sufficient in view of continued strong secular demand growth drivers, all strongly suggesting a continuation of the status quo through 2020."And, as noted by Mio Kato in Sumco: Recovery in Silicon Wafer Prices Fuel Growth; Unwarranted 60% Price Fall Creates Entry Point:"The company expects to see the current strong demand for 300mm wafers and 200mm wafers to continue into the medium-term. After suffering from years of oversupply and price declines, the market is currently going through constraints in wafer supply which has resulted in hikes in prices. We agree with the company’s view that 300mm wafer demand should grow through 2020..."At ¥2,436, Fujimi shares are selling at 13.6x our EPS estimate for this fiscal year and 13.1x our estimate for FY Mar-20. These multiples compare with an historical range of 9.1x to 23.9x in the past three fiscal years. Fujimi is a leading supplier of synthetic precision abrasive powders and slurries used in the lapping (removal of surface defects and thinning) and polishing of silicon wafers and other semiconductor substrates, the chemical mechanical planarization (CMP) of processed semiconductor wafers, and the polishing of computer hard disks. It has close to 90% of the global market for silicon wafer lapping and polishing abrasives and 8% of the fragmented market for CMP slurries. Customers include SUMCO, Shin-Etsu, Samsung Electronics, Intel, Micron, Global Foundries, TSMC, UMC, Western Digital, and mobile display makers in China. 

Fujimi (5384 JP): Share Price Down, Profits Ahead of Guidance

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Quantitative Analysis

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/068/507/original/2018-11-02_10-20-29.png?1541121653" class="editor-image img-responsive" data-smartkarma-image-id="68507"></figure>Source: Japan Analytics
NB: companies are colour-coded by sector
</div>28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the evolution in the ranking of the leading non-financial Japanese companies by market capitalisation measured at the end of each of the last 28 years.METHODOLOGY - Our comments follow in the detail below, but first a few notes:-<ul>
<li>In the interests of clarity (/sanity?), financials have been omitted. Twelve of the Top 20-ranked companies in 1990 were financials. However, only <a href="https://www.smartkarma.com/entities/742" target="_blank" data-smartkarma-citation="entities:742:1">Nomura (8604 JP)</a>, <a href="https://www.smartkarma.com/entities/6483" target="_blank" data-smartkarma-citation="entities:6483:1">Aozora (8304 JP)</a> and <a href="https://www.smartkarma.com/entities/16897" target="_blank" data-smartkarma-citation="entities:16897:1">Shinsei (8303 JP)</a> have survived in their original corporate structure and have the same ticker code. Our chart would have otherwise have included the now-merged IBJ, Fuji Bank, Dai-Ichi Kangyo Bank, Mitsubishi Bank, Sakura Bank, Sumitomo Bank, Tokai Bank, Sanwa Bank and Mitsubishi Trust Bank.  Excluded from the present-day Top 20 are <a href="https://www.smartkarma.com/entities/218" target="_blank" data-smartkarma-citation="entities:218:1">Mitsubishi UFJ (8306 JP)</a>, <a href="https://www.smartkarma.com/entities/217" target="_blank" data-smartkarma-citation="entities:217:1">Sumitomo Mitsui Financial (8316 JP)</a>, <a href="https://www.smartkarma.com/entities/838" target="_blank" data-smartkarma-citation="entities:838:1">Japan Post Bank (7182 JP)</a>, <a href="https://www.smartkarma.com/entities/359" target="_blank" data-smartkarma-citation="entities:359:1">Japan Post Holdings (6178 JP)</a> and <a href="https://www.smartkarma.com/entities/219" target="_blank" data-smartkarma-citation="entities:219:1">Mizuho Financial (8411 JP)</a> from the present day.</li>
<li>Only companies that were in the Top 20 in 1990 or 2018, as well as those companies that have been in the Top 10 for at least three of the last 28 years, have been included. </li>
<li>Two companies from 1990's Top 20 - Seibu Railway and Japan Airlines - have since been delisted. Although they have relisted as <a href="https://www.smartkarma.com/entities/458" target="_blank" data-smartkarma-citation="entities:458:1">Seibu Holdings (9024 JP)</a> and <a href="https://www.smartkarma.com/entities/1184" target="_blank" data-smartkarma-citation="entities:1184:1">Japan Airlines (9201 JP)</a>, they are no longer highly-ranked.</li>
<li>Seven current Top 20 companies - (<a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank (9984 JP)</a>, <a href="https://www.smartkarma.com/entities/1089" target="_blank" data-smartkarma-citation="entities:1089:1">NTT Docomo (9437 JP)</a>, <a href="https://www.smartkarma.com/entities/639" target="_blank" data-smartkarma-citation="entities:639:1">KDDI (9433 JP)</a>, <a href="https://www.smartkarma.com/entities/13498" target="_blank" data-smartkarma-citation="entities:13498:1">Japan Tobacco (2914 JP)</a>, <a href="https://www.smartkarma.com/entities/13520" target="_blank" data-smartkarma-citation="entities:13520:1">Central Japan Railway (9022 JP)</a>, <a href="https://www.smartkarma.com/entities/751" target="_blank" data-smartkarma-citation="entities:751:1">Fast Retailing (9983 JP)</a> and <a href="https://www.smartkarma.com/entities/15070" target="_blank" data-smartkarma-citation="entities:15070:1">Recruit (6098 JP)</a>)  - have listed during the last 28 years. </li>
</ul>THE 2050 RANKING?- Which of the current market leaders will still be in the Top 20 in 2050 in their current guise? For those still around to read this in 32 year's time, we would wager on just three - <a href="https://www.smartkarma.com/entities/3077" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/563" target="_blank" data-smartkarma-citation="entities:563:1">Sony (6758 JP)</a>.


Source: Japan Analytics
NB: companies are colour-coded by sector
28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the evolution in the ranking of the leading non-financial Japanese companies by market capitalisation measured at the end of each of the last 28 years.METHODOLOGY - Our comments follow in the detail below, but first a few notes:-
In the interests of clarity (/sanity?), financials have been omitted. Twelve of the Top 20-ranked companies in 1990 were financials. However, only Nomura (8604 JP), Aozora (8304 JP) and Shinsei (8303 JP) have survived in their original corporate structure and have the same ticker code. Our chart would have otherwise have included the now-merged IBJ, Fuji Bank, Dai-Ichi Kangyo Bank, Mitsubishi Bank, Sakura Bank, Sumitomo Bank, Tokai Bank, Sanwa Bank and Mitsubishi Trust Bank.  Excluded from the present-day Top 20 are Mitsubishi UFJ (8306 JP), Sumitomo Mitsui Financial (8316 JP), Japan Post Bank (7182 JP), Japan Post Holdings (6178 JP) and Mizuho Financial (8411 JP) from the present day.
Only companies that were in the Top 20 in 1990 or 2018, as well as those companies that have been in the Top 10 for at least three of the last 28 years, have been included. 
Two companies from 1990's Top 20 - Seibu Railway and Japan Airlines - have since been delisted. Although they have relisted as Seibu Holdings (9024 JP) and Japan Airlines (9201 JP), they are no longer highly-ranked.
Seven current Top 20 companies - (Softbank (9984 JP), NTT Docomo (9437 JP), KDDI (9433 JP), Japan Tobacco (2914 JP), Central Japan Railway (9022 JP), Fast Retailing (9983 JP) and Recruit (6098 JP))  - have listed during the last 28 years. 
THE 2050 RANKING?- Which of the current market leaders will still be in the Top 20 in 2050 in their current guise? For those still around to read this in 32 year's time, we would wager on just three - Keyence (6861 JP), Toyota Motor (7203 JP) and Sony (6758 JP). 

Japan: The Evolution Of (Non-Financial) Market Leadership

At ¥13,555 (Monday, October 29 closing price), Nidec is down 20% from its late September high. Reasons for this appear to include the anticipated increase in American tariffs on Chinese imports from the 10% implemented on September 24 to 25% on January 1, cyclical downturns in the auto and electronics industries, and falling demand for speed-reduction gears used in industrial robots. First rate management can  minimize the damage, but probably not overcome the impact of a deteriorating operating environment. Overall results for the six months to September were ahead of guidance, with operating profit up 20.1% year-on-year on an 8.6% increase in sales. Sales growth slowed from 11.9% in 1Q to 5.6% in 2Q, but operating profit growth was steady due to the ongoing rationalization of operations. Full-year FY Mar-19 guidance was left unchanged, with management forecasting 7.5% sales growth and a 16.9% increase in operating profit. This implies 6.5% and 11.6% year-on-year sales and profit increases in 2H, respectively.Assuming ongoing cyclical downturns in the company's final markets, aggravated by the impact of collapsing NAND flash memory prices on HDD pricing and demand for spindle motors, we are forecasting a 2% decline in sales and a 5% decline in operating profit in FY Mar-20. This forecast could be disrupted by M&amp;A, but new acquisitions would likely come with lower profit margins. The shares are selling at 27x our EPS estimate for FY Mar-19, 15x EV/projected EBITDA and 3.8x projected book value. Over the past few years, the P/E has found support at 20x, EV/EBITDA at 10x and the PBR at 2.5x. The company's long-term strategy is sound, in our opinion, but fading growth indicates further downside risk.

At ¥13,555 (Monday, October 29 closing price), Nidec is down 20% from its late September high. Reasons for this appear to include the anticipated increase in American tariffs on Chinese imports from the 10% implemented on September 24 to 25% on January 1, cyclical downturns in the auto and electronics industries, and falling demand for speed-reduction gears used in industrial robots. First rate management can  minimize the damage, but probably not overcome the impact of a deteriorating operating environment. Overall results for the six months to September were ahead of guidance, with operating profit up 20.1% year-on-year on an 8.6% increase in sales. Sales growth slowed from 11.9% in 1Q to 5.6% in 2Q, but operating profit growth was steady due to the ongoing rationalization of operations. Full-year FY Mar-19 guidance was left unchanged, with management forecasting 7.5% sales growth and a 16.9% increase in operating profit. This implies 6.5% and 11.6% year-on-year sales and profit increases in 2H, respectively.Assuming ongoing cyclical downturns in the company's final markets, aggravated by the impact of collapsing NAND flash memory prices on HDD pricing and demand for spindle motors, we are forecasting a 2% decline in sales and a 5% decline in operating profit in FY Mar-20. This forecast could be disrupted by M&amp;A, but new acquisitions would likely come with lower profit margins. The shares are selling at 27x our EPS estimate for FY Mar-19, 15x EV/projected EBITDA and 3.8x projected book value. Over the past few years, the P/E has found support at 20x, EV/EBITDA at 10x and the PBR at 2.5x. The company's long-term strategy is sound, in our opinion, but fading growth indicates further downside risk.

Nidec (6594): Slowing Growth Undermines Valuations

Japan Equity Analyst, all sectors

David Rubenstein

Life behind bars
We believe that Asahi has an interesting secular growth story unrealized by most institutional investors. At a Y37bn market cap, this small cap punches above its weight, trading $2 million dollars per day. However, we believe that the real value has yet to be unleashed. Asahi is the only listed pure-play bicycle retailer in Japan. It has the top market share at 18-20% and continues to increase share every year by opening new stores and expanding existing stores footprint.
Why we want to ride Asahi’s bicycles:
<ul>
<li>Secular growth: Solid, stable growth by ASP rise and store expansion.</li>
<li>Scale merit: smashing the local bike shops; procures low-cost China product.</li>
<li>Defensive: domestic play, anti-currency.</li>
<li>Carbon footprint low: Largest bike seller in Japan, could attract green funds.</li>
<li>Valuation attractive: PB of 1.4x is near all-time low.</li>
<li>Currency hedge: JPY strength against the RMB is a tailwind for earnings.</li>
</ul>

Life behind bars
We believe that Asahi has an interesting secular growth story unrealized by most institutional investors. At a Y37bn market cap, this small cap punches above its weight, trading $2 million dollars per day. However, we believe that the real value has yet to be unleashed. Asahi is the only listed pure-play bicycle retailer in Japan. It has the top market share at 18-20% and continues to increase share every year by opening new stores and expanding existing stores footprint.
Why we want to ride Asahi’s bicycles:

Secular growth: Solid, stable growth by ASP rise and store expansion.
Scale merit: smashing the local bike shops; procures low-cost China product.
Defensive: domestic play, anti-currency.
Carbon footprint low: Largest bike seller in Japan, could attract green funds.
Valuation attractive: PB of 1.4x is near all-time low.
Currency hedge: JPY strength against the RMB is a tailwind for earnings.


Asahi (3333 Jp): I Want to Ride My Bicycle

Japan

NIDEC CORPORATION is the world's leading manufacturer of small precision motors mainly used in HDD and optical disk drives. The company has extended its focus to the home appliance and automotive markets. NIDEC is active in M&A and its subsidiaries include the world's leading manufacturers of LCD panel handling robots and camera shutters.

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Nidec Corp (6594 JP)

Renesas: Surges 10% on Positive Nikkei Interview with CEO Suggests Solid M&A Knowhow

After its share price lost two thirds of its value over the last year Renesas Electronics (6723 JP) is surging today after a positive interview...

Mio Kato

Japan: The Evolution Of (Non-Financial) Market Leadership

28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the...

Campbell Gunn

Nidec (6594): Slowing Growth Undermines Valuations

At ¥13,555 (Monday, October 29 closing price), Nidec is down 20% from its late September high. Reasons for this appear to include the anticipated...

Scott Foster

Asahi (3333 Jp): I Want to Ride My Bicycle

Life behind bars We believe that Asahi has an interesting secular growth story unrealized by most institutional investors. At a Y37bn market cap,...

David Rubenstein

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52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Renesas: Surges 10% on Positive Nikkei Interview with CEO Suggests Solid M&A Knowhow

After its share price lost two thirds of its value over the last year Renesas Electronics (6723 JP) is surging today after a positive interview...

Mio Kato

Fujimi (5384 JP): Share Price Down, Profits Ahead of Guidance

Like its customer, silicon wafer producer SUMCO (3436 JP), Fujimi is geared primarily to silicon wafer demand, which remains strong. Nevertheless,...

Scott Foster

Japan: The Evolution Of (Non-Financial) Market Leadership

28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP - To offer some light relief from the current market, we have compiled a graphic illustrating the...

Campbell Gunn

Nidec (6594): Slowing Growth Undermines Valuations

At ¥13,555 (Monday, October 29 closing price), Nidec is down 20% from its late September high. Reasons for this appear to include the anticipated...

Scott Foster

Asahi (3333 Jp): I Want to Ride My Bicycle

Life behind bars We believe that Asahi has an interesting secular growth story unrealized by most institutional investors. At a Y37bn market cap,...

David Rubenstein