'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)

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<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>
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<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>
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<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>
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<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

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/689/original/2020-08-20_08-32-43.png?1597879991" class="editor-image img-responsive" data-smartkarma-image-id="153689"></figure><div class="content-caption">All charts sourced from Japan Analytics.</div><p><strong>BRUTAL</strong> - The summer earnings 'season' reflected the broadening impact of COVID-19 on the Japanese and world economies, however, in terms of profit decline, the pace is more moderate than in the previous quarter. Japanese corporates are starting to engage in aggressive cost controls. As a result, an with no signs of virus abating or a vaccine being readily available, earnings will continue to decline in the current quarter. We have yet to reach a low point in this earnings cycle. Many companies delayed making initial forecasts for the current year. As that deficiency is gradually remedied, earnings forecasts are leading trailing results to the downside. The 'gap' for operating profits is ¥5.7 trillion, or 13%. A similar percentage fall applies to net income. Operating income is forecast to be 41% below the peak level of 2019; for net income, the decline is 57%. The aggregate forecast operating margin of 4.8%% is 294 bps lower than the peak, while the forecast net margin is 318 bps lower at 2.67%. If achieved, this outcome will exceed that of the 2008/9 financial crisis when the aggregate was negative. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/694/original/2020-08-20_09-02-34.png?1597881766" class="editor-image img-responsive" data-smartkarma-image-id="153694"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/695/original/2020-08-20_09-03-07.png?1597881801" class="editor-image img-responsive" data-smartkarma-image-id="153695"></figure><p><strong>TTM RESULTS &amp; FORECASTS</strong> - Using trailing-twelve-month data to smooth out the seasonality in earnings, TTM operating income is 29% lower year-on-year on a 6% decline in sales. Running the same comparison using published forecasts, operating profit expectations are 40% lower than a year ago and revenues 10% lower.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/727/original/2020-08-20_10-57-21.png?1597888653" class="editor-image img-responsive" data-smartkarma-image-id="153727"></figure><p><strong>DAMN THE TORPEDOES</strong> - Our scoring methodology tracks all quarterly results since 2003 and every annual and interim forecast made since 2013. The lines above represent the cap-weighted aggregates of those scores overlayed with the daily series for TOPIX. Other than the three years before the advent of 'Abenomics' and the last six months, the directional correlation is clear.  Mr Market, supported by the BoJ and Federal Reserve, is 'banking' on a sharp and sustained recovery over the next two quarters. </p><div class="content-highlight"><p>In the<strong> DETAIL</strong> section below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. We shall also review our Results and Revision Scoring for the market, Sectors and Companies.</p></div>

All charts sourced from Japan Analytics.BRUTAL - The summer earnings 'season' reflected the broadening impact of COVID-19 on the Japanese and world economies, however, in terms of profit decline, the pace is more moderate than in the previous quarter. Japanese corporates are starting to engage in aggressive cost controls. As a result, an with no signs of virus abating or a vaccine being readily available, earnings will continue to decline in the current quarter. We have yet to reach a low point in this earnings cycle. Many companies delayed making initial forecasts for the current year. As that deficiency is gradually remedied, earnings forecasts are leading trailing results to the downside. The 'gap' for operating profits is ¥5.7 trillion, or 13%. A similar percentage fall applies to net income. Operating income is forecast to be 41% below the peak level of 2019; for net income, the decline is 57%. The aggregate forecast operating margin of 4.8%% is 294 bps lower than the peak, while the forecast net margin is 318 bps lower at 2.67%. If achieved, this outcome will exceed that of the 2008/9 financial crisis when the aggregate was negative. TTM RESULTS &amp; FORECASTS - Using trailing-twelve-month data to smooth out the seasonality in earnings, TTM operating income is 29% lower year-on-year on a 6% decline in sales. Running the same comparison using published forecasts, operating profit expectations are 40% lower than a year ago and revenues 10% lower.DAMN THE TORPEDOES - Our scoring methodology tracks all quarterly results since 2003 and every annual and interim forecast made since 2013. The lines above represent the cap-weighted aggregates of those scores overlayed with the daily series for TOPIX. Other than the three years before the advent of 'Abenomics' and the last six months, the directional correlation is clear.  Mr Market, supported by the BoJ and Federal Reserve, is 'banking' on a sharp and sustained recovery over the next two quarters. In the DETAIL section below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. We shall also review our Results and Revision Scoring for the market, Sectors and Companies.

🇯🇵 JAPAN • IT’S A WRAP - Summer 2020 Results & Revisions Review

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/891/original/2020-07-20_11-11-13.png?1595211104" class="editor-image img-responsive" data-smartkarma-image-id="146891"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>THE 'HUNDRED DAYS WAR'</strong> - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing low of 1,236.34 on 16th March, the index has recovered by 27%. However, it has only been in the last ten trading days that the number of new two-year share price highs and lows has consistently been in double-digits.  This month has seen 136 new two-year lows and 214 new two-year highs. Whatever the impact of COVID-19 on earnings, the market is very clearly signalling its preferences for COVID 'Heroes &amp; Villains'. In the <strong>DETAIL</strong> section below, we shall look at the leading large caps in both categories and suggest opportunities in each.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/894/original/2020-07-20_11-42-42.png?1595213322" class="editor-image img-responsive" data-smartkarma-image-id="146894"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>RELATIVE PRICE</strong> - We shall also conduct the same analysis using our Relative Price Score methodology. The July numbers are 469 Relative Price Score new lows and 229 new highs suggesting a high degree of market polarity as confirmed by the percentages of market value in Overbought and Oversold Stocks - which are both at twenty-year highs.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/146/895/original/2020-07-20_11-58-18.png?1595214235" class="editor-image img-responsive" data-smartkarma-image-id="146895"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>RESULTS DRIVER</strong> - We expect the number of absolute 'heroes and villains' to increase in the next two months as the COVID fallout on earnings is revealed, and will provide further updates as we progress. </p>

Source • Japan AnalyticsTHE 'HUNDRED DAYS WAR' - It is almost one hundred days since the equity markets began to discount the onset of COVID-19. Since the TOPIX closing low of 1,236.34 on 16th March, the index has recovered by 27%. However, it has only been in the last ten trading days that the number of new two-year share price highs and lows has consistently been in double-digits.  This month has seen 136 new two-year lows and 214 new two-year highs. Whatever the impact of COVID-19 on earnings, the market is very clearly signalling its preferences for COVID 'Heroes &amp; Villains'. In the DETAIL section below, we shall look at the leading large caps in both categories and suggest opportunities in each.Source • Japan AnalyticsRELATIVE PRICE - We shall also conduct the same analysis using our Relative Price Score methodology. The July numbers are 469 Relative Price Score new lows and 229 new highs suggesting a high degree of market polarity as confirmed by the percentages of market value in Overbought and Oversold Stocks - which are both at twenty-year highs.Source • Japan AnalyticsRESULTS DRIVER - We expect the number of absolute 'heroes and villains' to increase in the next two months as the COVID fallout on earnings is revealed, and will provide further updates as we progress. 

🇯🇵 JAPAN • The Hundred Days War - COVID Heroes & Villains

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/068/original/2020-07-09_13-43-33.png?1594269841" class="editor-image img-responsive" data-smartkarma-image-id="145068"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>WHAT CURRENCY RISK?</strong> - It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short 'blip' to ¥102.36 on 9th March.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/095/original/2020-07-09_15-04-02.png?1594274675" class="editor-image img-responsive" data-smartkarma-image-id="145095"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>¥ BELOW 100</strong> -  If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen 'peaks' we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/101/original/2020-07-09_15-13-11.png?1594275216" class="editor-image img-responsive" data-smartkarma-image-id="145101"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>KEY DRIVER </strong>- Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results &amp; Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.</p><hr><p style="text-align: center;"><strong>• CORRELATION ANALYSIS •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/499/original/2020-07-12_12-55-49.png?1594526165" class="editor-image img-responsive" data-smartkarma-image-id="145499"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/500/original/2020-07-12_13-13-53.png?1594527254" class="editor-image img-responsive" data-smartkarma-image-id="145500"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div><p><strong>CORRELATIONS</strong> - Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of <a href="https://www.smartkarma.com/entities/nippon-express-co-ltd" target="_blank" data-smartkarma-citation="entities:18582:1" rel="noopener">Nippon Express (9062 JP)</a>, while <a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon (7731 JP)</a> is negatively correlated. </p><hr><p style="text-align: center;"><strong>• THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/502/original/2020-07-12_13-22-12.png?1594527750" class="editor-image img-responsive" data-smartkarma-image-id="145502"></figure><div class="content-caption">Source • Japan Analytics</div><p style="text-align: left;"><strong>FCTA </strong>- The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model.  The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/273/original/2020-07-10_16-08-25.png?1594364929" class="editor-image img-responsive" data-smartkarma-image-id="145273"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CITC &amp; NET INCOME</strong> - Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently 'recycled' as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders' Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders' Equity for non-financial Japanese companies.  In the last two reported quarters, the 'gap' between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/447/original/2020-07-12_10-58-45.png?1594519146" class="editor-image img-responsive" data-smartkarma-image-id="145447"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>FCTA BY SECTOR</strong> - Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors - <strong>Autos</strong>, <strong>Wholesale</strong>, <strong>Electrical Equipment</strong>,<strong> Technology Hardware</strong>, <strong>Machinery</strong>, <strong>Other Consumer Products</strong> and <strong>Telecommunications </strong>(Softbank Group). The least-exposed Sectors are<strong> Services</strong>, <strong>IT</strong> &amp;<strong> Internet</strong>,<strong> Multi-Industry</strong> and<strong> Restaurants</strong>.</p><hr><p>In the<strong> DETAIL</strong> section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where <a href="https://www.smartkarma.com/entities/eisai-co-ltd" target="_blank" data-smartkarma-citation="entities:21001:1" rel="noopener">Eisai Co Ltd (4523 JP)</a> and <a href="https://www.smartkarma.com/entities/dic-corp" target="_blank" data-smartkarma-citation="entities:7343:1" rel="noopener">Dic Corp (4631 JP)</a> have the most significant amounts of positive and negative Accumulated FCTA's relative to Equity, respectively.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/448/original/2020-07-12_11-12-20.png?1594519955" class="editor-image img-responsive" data-smartkarma-image-id="145448"></figure><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/145/617/original/2020-07-13_15-35-04.png?1594622118" class="editor-image img-responsive" data-smartkarma-image-id="145617"></figure><p>Source • Japan Analytics</p>
</div><div class="content-highlight"><p><strong>This Part 6 concludes our Stress Test series. However, forthcoming Insights will look at the Valuation Differences component of Other Comprehensive Income and those companies with the most substantial CITC/Net Income 'gaps'.</strong></p></div>

Source • Japan AnalyticsWHAT CURRENCY RISK? - It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short 'blip' to ¥102.36 on 9th March.Source • Japan Analytics¥ BELOW 100 -  If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen 'peaks' we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.Source • Japan AnalyticsKEY DRIVER - Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results &amp; Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.• CORRELATION ANALYSIS •Source • Japan AnalyticsCORRELATIONS - Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of Nippon Express (9062 JP), while Nikon (7731 JP) is negatively correlated. • THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •Source • Japan AnalyticsFCTA - The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model.  The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.Source • Japan AnalyticsCITC &amp; NET INCOME - Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently 'recycled' as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders' Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders' Equity for non-financial Japanese companies.  In the last two reported quarters, the 'gap' between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.Source • Japan AnalyticsFCTA BY SECTOR - Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors - Autos, Wholesale, Electrical Equipment, Technology Hardware, Machinery, Other Consumer Products and Telecommunications (Softbank Group). The least-exposed Sectors are Services, IT &amp; Internet, Multi-Industry and Restaurants.In the DETAIL section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where Eisai Co Ltd (4523 JP) and Dic Corp (4631 JP) have the most significant amounts of positive and negative Accumulated FCTA's relative to Equity, respectively.
Source • Japan Analytics
This Part 6 concludes our Stress Test series. However, forthcoming Insights will look at the Valuation Differences component of Other Comprehensive Income and those companies with the most substantial CITC/Net Income 'gaps'.

🇯🇵 JAPAN • Stress Tests Part 6: Currency Risk

<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

NIKON CORPORATION manufactures and sells cameras, lenses, semiconductor-related equipment, eyeglasses, microscopes, and measuring instruments.

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Nikon Corp (7731 JP)

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