'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. 

Equity Bottom-Up

<div class="content-caption">
<p></p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/078/315/original/2019-02-09_12-04-43.png?1549681495" class="editor-image img-responsive" data-smartkarma-image-id="78315"></figure>
<p>Source: Japan Analytics</p>
</div>
<p><strong>TUMBLING DICE</strong> - After <a href="https://www.smartkarma.com/entities/18379" target="_blank" data-smartkarma-citation="entities:18379:1">ZOZO (3092 JP)</a> (-52%) and <a href="https://www.smartkarma.com/entities/27149" target="_blank" data-smartkarma-citation="entities:27149:1">Mercari (4385 JP)</a> (-50%), <a href="https://www.smartkarma.com/entities/8197" target="_blank" data-smartkarma-citation="entities:8197:1">CyberAgent (4751 JP)</a> is the worst-performing large-cap <strong>Internet</strong> stock in Japan over the last seven months.  The company is the sector's leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market <em>annually</em> over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, <strong>CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.</strong></p>
<p><strong>PASSIVE PERILS </strong>- We will discuss the 'perils ' of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the 'perils' of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace <a href="https://www.smartkarma.com/entities/19521" target="_blank" data-smartkarma-citation="entities:19521:1">Furukawa (5715 JP)</a> in the Nikkei 225 index, with the inclusion occurring on October 1st.<strong> Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   </strong></p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/078/317/original/2019-02-09_12-52-50.png?1549684397" class="editor-image img-responsive" data-smartkarma-image-id="78317"></figure>
<div class="content-caption">Source: CyberAgent Way 2018</div>
<p><strong>SUMMARY</strong> - CyberAgent's business has three 'pillars', internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these 'pillars' have degraded significantly,  while the fledgeling TV business remains in 'up-front' investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called '<em>Abema Towers</em>' in March. We shall refrain from making any analogies to the <a href="https://en.wikipedia.org/wiki/Skyscraper_Index" target="_blank">Skyscraper Index</a>. </p>
<div class="content-highlight">
<p><strong>This Insight will review: - </strong></p>
<ul>
<li class=""><strong>CyberAgent's growth strategy</strong></li>
<li class=""><strong>The company's track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins </strong></li>
<li class=""><strong>The three main business segments - Internet Advertising, Game Software, and Media</strong></li>
<li class=""><strong>Cash Flow and Valuation</strong></li>
</ul>
<p><strong>We will also</strong><strong> attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market's current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago. </strong></p>
</div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/078/318/original/2019-02-09_13-06-39.png?1549685220" class="editor-image img-responsive" data-smartkarma-image-id="78318"></figure>
<div class="content-caption">Source: CyberAgent Way 2018</div>
<p><strong>VISION SHIFT?</strong> - In previous years, CyberAgent had a clear vision statement - <em>'To create the 21st century's leading company'</em>. The company's recent performance has led to a change of tone, and CyberAgent is now rather more modestly just <em>'Aiming to be a company with medium to long-term supporters'</em>.  In the vein of the lyrics from the best song on the best Rolling Stones album, <em>Exile on Main Street</em>, the business has recently been at 'all sixes and sevens and nines'. <strong>In the search for new 'supporters', we encourage CyberAgent to just 'keep on rolling', letting the dice fall where they may. </strong></p>
<center><iframe src="https://www.youtube.com/embed/6U8JlcB_BzA" width="963" height="722" frameborder="0" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="allowfullscreen"></iframe></center>
<div class="content-caption">Exile on Main Street/Tumbling Dice - Jagger/Richards 1972 </div>




Source: Japan Analytics

TUMBLING DICE - After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector's leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.
PASSIVE PERILS - We will discuss the 'perils ' of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the 'perils' of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

Source: CyberAgent Way 2018
SUMMARY - CyberAgent's business has three 'pillars', internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these 'pillars' have degraded significantly,  while the fledgeling TV business remains in 'up-front' investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called 'Abema Towers' in March. We shall refrain from making any analogies to the Skyscraper Index. 

This Insight will review: - 

CyberAgent's growth strategy
The company's track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins 
The three main business segments - Internet Advertising, Game Software, and Media
Cash Flow and Valuation

We will also attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market's current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago. 


Source: CyberAgent Way 2018
VISION SHIFT? - In previous years, CyberAgent had a clear vision statement - 'To create the 21st century's leading company'. The company's recent performance has led to a change of tone, and CyberAgent is now rather more modestly just 'Aiming to be a company with medium to long-term supporters'.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at 'all sixes and sevens and nines'. In the search for new 'supporters', we encourage CyberAgent to just 'keep on rolling', letting the dice fall where they may. 

Exile on Main Street/Tumbling Dice - Jagger/Richards 1972 

Equity Analyst, LightStream Research

Farha Sabri

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.

<ul>
<li>Nintendo recorded strong revenue and OP performance in 3QFY03/19. Revenue for the quarter amounted to JPY608.4bn (+25.9% YoY) and OP amounted to JPY158.6bn (+36.1% YoY).</li>
<li>Albeit strong performance across topline and bottomline, the company downgraded the sales units forecast for the Switch from 20m to 17m for FY03/19. Switch unit sales continue to be heavily driven by software releases. The company has only two hit software releases planned for 4QFY03/19. As such, the company has not made any changes to guidance. </li>
<li>The company continues to broaden its reach in the mobile gaming market with two releases set for summer 2019. While this may help the company reduce its reliance on gaming consoles over the long run, currently, mobile games make up less than 10% of the company's topline.</li>
<li>Based on our estimates, Nintendo is currently trading at a FY1 EV/EBIT multiple of 11.4x, lower than its historical median of 13.4x.</li>
</ul>


Nintendo recorded strong revenue and OP performance in 3QFY03/19. Revenue for the quarter amounted to JPY608.4bn (+25.9% YoY) and OP amounted to JPY158.6bn (+36.1% YoY).
Albeit strong performance across topline and bottomline, the company downgraded the sales units forecast for the Switch from 20m to 17m for FY03/19. Switch unit sales continue to be heavily driven by software releases. The company has only two hit software releases planned for 4QFY03/19. As such, the company has not made any changes to guidance. 
The company continues to broaden its reach in the mobile gaming market with two releases set for summer 2019. While this may help the company reduce its reliance on gaming consoles over the long run, currently, mobile games make up less than 10% of the company's topline.
Based on our estimates, Nintendo is currently trading at a FY1 EV/EBIT multiple of 11.4x, lower than its historical median of 13.4x.


Nintendo Downgrades Switch Unit Sales Forecast for FY03/19 Despite Strong 3Q Financial Performance

<p>Nintendo reported their 2QFY03/19 in October with results showing growth at both the top line and bottom line albeit not living up to consensus expectations. Top line grew by 4.0% YoY to JPY388.9bn in 1H03/19 while OP grew by 53.9% YoY to JPY61.4bn. OP in the last quarter (2QFY03/19) was the second highest the company has experienced over the last five years. This growth has been mainly driven by the sales of Nintendo Switch hardware which sold just over 5m units in 1HFY03/19. However, YoY growth remained at 3.4% compared to 4.9m units sold in 1HFY03/18. This has left investors worried about Nintendo’s aggressive target of selling 20m units of the Switch for FY03/19. Of this target, the company has managed to achieve only around 25.0% in 1H. Nintendo’s financial performance follows a seasonal trend with the December quarter showing stronger performance due to increased sales during Christmas. While the company’s current quarter is likely to show strong results, we remain skeptical about the company reaching the aforementioned target for FY03/19.</p><p style="text-align: center;"><strong><em>Switch Sales Have Caused an Improvement in Nintendo’s OP….</em></strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/074/187/original/N1.png?1546236712" class="editor-image img-responsive" data-smartkarma-image-id="74187"></figure><div style="text-align: left;" class="content-caption">Source: Capital IQ</div><p style="text-align: center;"><strong><em>….Despite a Slowdown in the Growth of Units Sales</em></strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/074/188/original/N2.png?1546236765" class="editor-image img-responsive" data-smartkarma-image-id="74188"></figure><div style="text-align: left;" class="content-caption">Source: Nintendo website</div><p style="text-align: center;"><strong><em>Nintendo’s Last Quarter Has Also Failed to Live Up To Consensus Expectations</em></strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/074/189/original/N3.png?1546236801" class="editor-image img-responsive" data-smartkarma-image-id="74189"></figure><div style="text-align: left;" class="content-caption">Source: Capital IQ</div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/074/191/original/N4.png?1546236825" class="editor-image img-responsive" data-smartkarma-image-id="74191"></figure><div style="text-align: left;" class="content-caption">Source: Capital IQ</div>

Nintendo reported their 2QFY03/19 in October with results showing growth at both the top line and bottom line albeit not living up to consensus expectations. Top line grew by 4.0% YoY to JPY388.9bn in 1H03/19 while OP grew by 53.9% YoY to JPY61.4bn. OP in the last quarter (2QFY03/19) was the second highest the company has experienced over the last five years. This growth has been mainly driven by the sales of Nintendo Switch hardware which sold just over 5m units in 1HFY03/19. However, YoY growth remained at 3.4% compared to 4.9m units sold in 1HFY03/18. This has left investors worried about Nintendo’s aggressive target of selling 20m units of the Switch for FY03/19. Of this target, the company has managed to achieve only around 25.0% in 1H. Nintendo’s financial performance follows a seasonal trend with the December quarter showing stronger performance due to increased sales during Christmas. While the company’s current quarter is likely to show strong results, we remain skeptical about the company reaching the aforementioned target for FY03/19.Switch Sales Have Caused an Improvement in Nintendo’s OP….Source: Capital IQ….Despite a Slowdown in the Growth of Units SalesSource: Nintendo websiteNintendo’s Last Quarter Has Also Failed to Live Up To Consensus ExpectationsSource: Capital IQSource: Capital IQ

Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?

Japan TMT Analyst

Pelham Smithers

Market Intel on Asian Tech with a Japan focus

Pelham Smithers Associates

Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods. 

Research is provided by the following:
Pelham Smithers: Macro, consumer electronics, telecoms & pharma
Joel Scheiman: Electronics materials / components
Julie Boote: Autos
Will Nestuk: Capital goods, machinery & transportation equipment parts
Thao Nguyen: eCommerce, internet content, marketing & advertising

<p>The market has assumed that Mixi not only can't replicate the success of Monster Strike but will continue to waste the proceeds trying. That no longer appears to be the case, with the result that Mixi looks to be one of the bigger bargains in the bargain-rich Japanese stock market right now.</p>

The market has assumed that Mixi not only can't replicate the success of Monster Strike but will continue to waste the proceeds trying. That no longer appears to be the case, with the result that Mixi looks to be one of the bigger bargains in the bargain-rich Japanese stock market right now.

Mixi (2121 JP) - When You've Got a Golden Goose...

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><p>Source: Japan Analytics</p>
<p>NB: companies are colour-coded by sector</p>
</div><p style="text-align: left;"><strong>28 YEARS OF NON-FINANCIAL MARKET LEADERSHIP</strong> - 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.</p><p><strong>METHODOLOGY</strong> - Our comments follow in the detail below, but first a few notes:-</p><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><p><strong>THE 2050 RANKING?</strong>- 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>. </p>


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

Japan

Nintendo Co., Ltd. globally develops, manufactures and sells home-use video game hardware and software in home entertainment business.  The company also produces home-game products including cards.

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Nintendo (7974 JP)

CyberAgent: Tumbling Dice

TUMBLING DICE - After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in...

Campbell Gunn

Nintendo Downgrades Switch Unit Sales Forecast for FY03/19 Despite Strong 3Q Financial Performance

Nintendo recorded strong revenue and OP performance in 3QFY03/19. Revenue for the quarter amounted to JPY608.4bn (+25.9% YoY) and OP amounted to...

Farha Sabri

Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?

Nintendo reported their 2QFY03/19 in October with results showing growth at both the top line and bottom line albeit not living up to consensus...

Farha Sabri

Mixi (2121 JP) - When You've Got a Golden Goose...

The market has assumed that Mixi not only can't replicate the success of Monster Strike but will continue to waste the proceeds trying. That no...

Pelham Smithers Associates

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

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