'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)

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/139/997/original/2020-06-15_11-08-56.png?1592186965" class="editor-image img-responsive" data-smartkarma-image-id="139997"></figure><div class="content-caption">Source: Japan Analytics</div>
STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. <a href="https://www.smartkarma.com/insights/japan-stress-tests-part-1-altman-z-scores" target="_blank" data-smartkarma-citation="insights:40180" rel="noopener">Part 1</a> looked at the time-worn Altman-Z Score for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the 'lifeblood' of all businesses - Operating Cash Flow.
ACCRUAL ACCOUNTING - Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, "Accrual accounting brings the future forward in time and anticipates future cash flows."  Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)'s</a> Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company's Relative Price Score over the last thirty years. Further Insights in this series will continue to 'mine'  the Cash Flow statement by exploring Financing Cash Flows and the Working Capital Cycle.
REFORMULATED CASH FLOWSTATEMENTS - Our Operating Cash Flow calculation is derived from each company's Balance Sheet and Income Statement for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into Operating Cash Flow and Investing Cash Flow, which includes Fixed Asset and Inventory Cash Flows.  Cash flows relating to financing activities are divided into Financing Cash Flow and Shareholder Cash Flow. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of Other Comprehensive Income which are added to or subtracted from Shareholders' Equity. 
</div>UNIVERSE - The universe for this Insight comprises the 614 Japanese companies with a market capitalisation excluding Treasury Stock over ¥100 million and for which we have at least two years of cash flow data.  Five non-financial companies, which have significant financial subsidiaries (<a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a>, <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>), have been excluded from this analysis.


Source: Japan Analytics
STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. Part 1 looked at the time-worn Altman-Z Score for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the 'lifeblood' of all businesses - Operating Cash Flow.
ACCRUAL ACCOUNTING - Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, "Accrual accounting brings the future forward in time and anticipates future cash flows."  Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. Nissan Motor (7201 JP)'s Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company's Relative Price Score over the last thirty years. Further Insights in this series will continue to 'mine'  the Cash Flow statement by exploring Financing Cash Flows and the Working Capital Cycle.
REFORMULATED CASH FLOWSTATEMENTS - Our Operating Cash Flow calculation is derived from each company's Balance Sheet and Income Statement for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into Operating Cash Flow and Investing Cash Flow, which includes Fixed Asset and Inventory Cash Flows.  Cash flows relating to financing activities are divided into Financing Cash Flow and Shareholder Cash Flow. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of Other Comprehensive Income which are added to or subtracted from Shareholders' Equity. 
UNIVERSE - The universe for this Insight comprises the 614 Japanese companies with a market capitalisation excluding Treasury Stock over ¥100 million and for which we have at least two years of cash flow data.  Five non-financial companies, which have significant financial subsidiaries (Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)), have been excluded from this analysis. 

🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow & Accruals

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Bottom-Up

AP Moeller - Maersk A/S / Equity Bottom-Up

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/134/295/original/BANNER-CARGO.png?1589834679" class="editor-image img-responsive" data-smartkarma-image-id="134295"></figure>
Covid-19 and the measures put in place to slow its spread have wreaked havoc on ocean and air cargo markets in 2020. April data show a number of highly unusual market dynamics at work. 
Our model shows container rates dipped in April, falling 5% YoY. Despite this decline, we believe container rates are supported by an unusual equipment shortage. Furthermore, we believe carrier margins could remain stable in Q220 as ship fuel costs have declined sharply compared to 2019.
In air cargo, an unprecedented set of circumstances led to a  dramatic rise of yields (pricing) in April. In the case of two Taiwanese airlines with significant exposure to cargo, air cargo demand increased by just 3% YoY in April, but yields more than doubled, boosting segment revenues. 
Low fuel prices and an equipment shortage may continue to limit the deterioration of container shipping profitability in 2020. Meanwhile, even unprecedented price increases in air cargo are not enough to offset the dramatic declines of most airlines' passenger revenues.


Covid-19 and the measures put in place to slow its spread have wreaked havoc on ocean and air cargo markets in 2020. April data show a number of highly unusual market dynamics at work. 
Our model shows container rates dipped in April, falling 5% YoY. Despite this decline, we believe container rates are supported by an unusual equipment shortage. Furthermore, we believe carrier margins could remain stable in Q220 as ship fuel costs have declined sharply compared to 2019.
In air cargo, an unprecedented set of circumstances led to a  dramatic rise of yields (pricing) in April. In the case of two Taiwanese airlines with significant exposure to cargo, air cargo demand increased by just 3% YoY in April, but yields more than doubled, boosting segment revenues. 
Low fuel prices and an equipment shortage may continue to limit the deterioration of container shipping profitability in 2020. Meanwhile, even unprecedented price increases in air cargo are not enough to offset the dramatic declines of most airlines' passenger revenues. 

TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Dip in April, Air Cargo Yields Double!

Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

SR Services provides Strategic Knowledge and Solutions services for Family Offices and Corporate Business. 

We deliver this via advisory services, strategic planning, opportunity analysis/sourcing, as well as solution implementation. 

Whilst, we create intellectual discipline and operational leverage for your projects or daily activities, our ultimate objective is to empower whilst enhancing your decision making. 

Strategic Knowledge and Solutions

Cross Asset Strategy

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Deteriorating credit metrics continue to support our view that the level of risk is increasing within the small-mid cap universe. </li>
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Our screen looks for high valuation multiples presented by candidates with significant earnings growth forecasts, as well as financial indicators that suggest balance sheet distress. Therefore, with the credit markets pointing towards high yield stress, this screen becomes highly relevant.</li>
<li>
15 stocks appear in our Q2 2020 screen. The average stock rank in our list has decreased to 67.5 from 72.1 points since early March 2019. The reduction reflects some of the continued bearish moves in recent weeks within the Asian Universe. We, therefore, feel, as highlighted in other recent commentary, that the market is currently undergoing a defined separation of Quality, Value and relative Momentum.</li>
</ul>



Deteriorating credit metrics continue to support our view that the level of risk is increasing within the small-mid cap universe. 

Our screen looks for high valuation multiples presented by candidates with significant earnings growth forecasts, as well as financial indicators that suggest balance sheet distress. Therefore, with the credit markets pointing towards high yield stress, this screen becomes highly relevant.

15 stocks appear in our Q2 2020 screen. The average stock rank in our list has decreased to 67.5 from 72.1 points since early March 2019. The reduction reflects some of the continued bearish moves in recent weeks within the Asian Universe. We, therefore, feel, as highlighted in other recent commentary, that the market is currently undergoing a defined separation of Quality, Value and relative Momentum.


Screening the Silk Road: Q2 2020 Small-Mid Cap High Risk Names to Avoid

Our monthly index suggests average container rates in March increased by 7.6% YoY despite measurably weak trade activity in key export and import markets. Although we believe overall container shipping revenues declined  in March (on lower volumes), unit pricing has held up surprisingly well due to a developing equipment shortage.
What's behind the equipment shortage? Weak North American imports from previous months and slower turnaround times resulted in a sharp decline in the export of empty containers in March (-35% YoY, mainly to Asia). The resulting shortage of empties in key cargo origins means that even though there is plenty of space on ships, there is nevertheless an equipment shortage that appears to be contributing to tight market conditions. In the near-term this is positive for container carriers, container leasing companies, and probably Asian container manufacturers, too.
Bunker (ship fuel) prices in mid-April were down sharply compared to mid-March (-30%) and April 2019 (-38%). With fuel equivalent to 15-20% of a typical container carrier's revenue, the sharp drop in bunker prices is a good thing for carrier profitability. If the equipment shortage we noted above is not resolved quickly, we believe carrier profitability in Q2 2020 could beat low expectations.
Conclusion: Container shipping rates appear to be holding up much better than expected due to a developing equipment shortage, which may take some time to resolve. Carriers also benefit from sharply lower fuel prices, and near-term profitability may surprise on the upside. In addition to container carriers like <a href="https://www.smartkarma.com/entities/evergreen-marine-corp-ltd" target="_blank" data-smartkarma-citation="entities:15428:1" rel="noopener">Evergreen Marine Corp (2603 TT)</a> and Danish giant <a href="https://www.smartkarma.com/entities/ap-moeller-maersk-a-s" target="_blank" data-smartkarma-citation="entities:22428:1" rel="noopener">Ap Moeller - Maersk A/S (MAERSKB DC)</a>, we believe container leasing companies like <a href="https://www.smartkarma.com/entities/triton-international-limited" target="_blank" data-smartkarma-citation="entities:23598:1" rel="noopener">Triton International (TRTN US)</a> and even container manufacturers (<a href="https://www.smartkarma.com/entities/singamas-container-hldgs" target="_blank" data-smartkarma-citation="entities:13602:1" rel="noopener">Singamas Container Hldgs (716 HK)</a>, <a href="https://www.smartkarma.com/entities/china-international-marine-cntnrs-gp-ltd" target="_blank" data-smartkarma-citation="entities:11752:1" rel="noopener">China International Marine Cntnrs Gp (2039 HK)</a> could benefit from an equipment shortage in the near-term.

Our monthly index suggests average container rates in March increased by 7.6% YoY despite measurably weak trade activity in key export and import markets. Although we believe overall container shipping revenues declined  in March (on lower volumes), unit pricing has held up surprisingly well due to a developing equipment shortage.
What's behind the equipment shortage? Weak North American imports from previous months and slower turnaround times resulted in a sharp decline in the export of empty containers in March (-35% YoY, mainly to Asia). The resulting shortage of empties in key cargo origins means that even though there is plenty of space on ships, there is nevertheless an equipment shortage that appears to be contributing to tight market conditions. In the near-term this is positive for container carriers, container leasing companies, and probably Asian container manufacturers, too.
Bunker (ship fuel) prices in mid-April were down sharply compared to mid-March (-30%) and April 2019 (-38%). With fuel equivalent to 15-20% of a typical container carrier's revenue, the sharp drop in bunker prices is a good thing for carrier profitability. If the equipment shortage we noted above is not resolved quickly, we believe carrier profitability in Q2 2020 could beat low expectations.
Conclusion: Container shipping rates appear to be holding up much better than expected due to a developing equipment shortage, which may take some time to resolve. Carriers also benefit from sharply lower fuel prices, and near-term profitability may surprise on the upside. In addition to container carriers like Evergreen Marine Corp (2603 TT) and Danish giant Ap Moeller - Maersk A/S (MAERSKB DC), we believe container leasing companies like Triton International (TRTN US) and even container manufacturers (Singamas Container Hldgs (716 HK), China International Marine Cntnrs Gp (2039 HK) could benefit from an equipment shortage in the near-term. 

TRACKING TRAFFIC/Container Shipping: Shortage of Empties Creates Surprisingly Tight Conditions

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

Our index suggests average container shipping rates increased by around 6.6% in January. This is the largest YoY increase for our index since June 2019 and follows two consecutive months of YoY declines. However, despite the increase, we believe container shipping margins remain under pressure. The required shift to more expensive low-sulphur fuel (effective January 1st) led to a sharp rise in operating costs, too. We suspect higher average container rates in January -- the result of General Rate Increases (GRIs) and a new Low-Sulphur Surcharge (LSS) in some tradelanes -- recovered less than the full increase in actual fuel expenses. Looking forward, it's clear that the COVID-19 outbreak has temporarily emptied ships sailing from Asia to North America and Europe, and that normalcy may not return for some time. Although carriers continue to push for additional rate and surcharge increases in the coming weeks, we don't think these increases will 'stick' unless or until ships begin to fill up again, which we don't expect to happen in 2020. We continue to believe near-term container shipping earnings are likely to decline for most carriers. Despite optimism about the potential for improved trade relations between the US and China and a a demand 'snap-back' once COVID-19 is controlled, we would avoid the segment for now.

Our index suggests average container shipping rates increased by around 6.6% in January. This is the largest YoY increase for our index since June 2019 and follows two consecutive months of YoY declines. However, despite the increase, we believe container shipping margins remain under pressure. The required shift to more expensive low-sulphur fuel (effective January 1st) led to a sharp rise in operating costs, too. We suspect higher average container rates in January -- the result of General Rate Increases (GRIs) and a new Low-Sulphur Surcharge (LSS) in some tradelanes -- recovered less than the full increase in actual fuel expenses. Looking forward, it's clear that the COVID-19 outbreak has temporarily emptied ships sailing from Asia to North America and Europe, and that normalcy may not return for some time. Although carriers continue to push for additional rate and surcharge increases in the coming weeks, we don't think these increases will 'stick' unless or until ships begin to fill up again, which we don't expect to happen in 2020. We continue to believe near-term container shipping earnings are likely to decline for most carriers. Despite optimism about the potential for improved trade relations between the US and China and a a demand 'snap-back' once COVID-19 is controlled, we would avoid the segment for now.

TRACKING TRAFFIC/Containers & Air Cargo: Rates Rose in January, But Margins Remain Under Pressure

Japan

Nippon Yusen Kabushiki Kaisha mainly provides marine transportation services and transportation management solution from international hub ports to both domestic and international ports. The Company operates container transportation, tramp and specialized carriers, and logistics and cruise lines. Nippon Yusen offers scheduled and unscheduled transportation services around the world.

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Nippon Yusen Kk (9101 JP)

🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow & Accruals

STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated...

Campbell Gunn

TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Dip in April, Air Cargo Yields Double!

Covid-19 and the measures put in place to slow its spread have wreaked havoc on ocean and air cargo markets in 2020. April data show a number of...

Tracking Traffic

Screening the Silk Road: Q2 2020 Small-Mid Cap High Risk Names to Avoid

Deteriorating credit metrics continue to support our view that the level of risk is increasing within the small-mid cap universe. Our screen...

David Lepper

TRACKING TRAFFIC/Container Shipping: Shortage of Empties Creates Surprisingly Tight Conditions

Our monthly index suggests average container rates in March increased by 7.6% YoY despite measurably weak trade activity in key export and import...

Tracking Traffic

TRACKING TRAFFIC/Containers & Air Cargo: Rates Rose in January, But Margins Remain Under Pressure

Our index suggests average container shipping rates increased by around 6.6% in January. This is the largest YoY increase for our index since June...

Daniel Hellberg

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