Equity Analyst, LightStream Research

Oshadhi Kumarasiri

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.

Event-Driven

<p>Last week, the Nihon Keizai Shimbun reported that the US private equity firm Carlyle Group intends to invest over ¥1.0 trillion in Japan over the next five years. <a href="https://www.smartkarma.com/profiles/mio-kato" target="_blank" rel="noopener">Mio Kato</a> has suggested three potential candidates based on Carlyle’s previous investments in Japan - <a href="https://www.smartkarma.com/entities/a-d-company-ltd" target="_blank" rel="noopener">A&amp;D (7745 JP)</a>, <a href="https://www.smartkarma.com/entities/fujio-food-system-co-ltd" target="_blank" data-smartkarma-citation="entities:12242:1" rel="noopener">Fujio Food System (2752 JP)</a>, and <a href="https://www.smartkarma.com/entities/fuji-oil-holdings-inc" target="_blank" data-smartkarma-citation="entities:4035:1" rel="noopener">Fuji Oil (2607 JP)</a>. In this Insight, we review Fuji Oil, a food materials company, in which <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" data-smartkarma-citation="entities:18448:1" rel="noopener">Itochu (8001 JP)</a> has a 38.5% stake (an increase from 33.2% in March 2020).</p>

Last week, the Nihon Keizai Shimbun reported that the US private equity firm Carlyle Group intends to invest over ¥1.0 trillion in Japan over the next five years. Mio Kato has suggested three potential candidates based on Carlyle’s previous investments in Japan - A&amp;D (7745 JP), Fujio Food System (2752 JP), and Fuji Oil (2607 JP). In this Insight, we review Fuji Oil, a food materials company, in which Itochu (8001 JP) has a 38.5% stake (an increase from 33.2% in March 2020).

Fuji Oil In Itochu's Industry Consolidation Plans?

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

<div>
<a href="https://www.smartkarma.com/profiles/devi-subhakesan" target="_blank" data-smartkarma-citation="accounts:1913" rel="noopener">Devi Subhakesan</a> mentioned in her report in <a href="https://www.smartkarma.com/insights/indofood-cbp-icbp-ij-us-3bn-acqsn-of-affiliate-dizzy-valuation-earnings-dilution" target="_blank" data-smartkarma-citation="insights:39793" rel="noopener">Indofood CBP (ICBP IJ): US$ 3Bn Acqsn. Of Affiliate - Dizzy Valuation, Earnings Dilution</a> that the deal is not exactly value-accretive for the shareholders due to the expensive multiples that the company pays and the overleveraged in the balance sheet that further burden the net income. The flip side is that as <a href="https://www.smartkarma.com/profiles/angus-mackintosh" target="_blank" data-smartkarma-citation="accounts:937" rel="noopener">Angus Mackintosh</a> mentioned in <a href="https://www.smartkarma.com/insights/indofood-cbp-sukses-icbp-ij-going-global-with-instant-noodles" target="_blank" data-smartkarma-citation="insights:41873" rel="noopener">Indofood CBP Sukses (ICBP IJ) - Going Global with Instant Noodles</a> is that it has expanded its horizon to outside Indonesia and becomes an Emerging Market Consumer Staple play. </div>
<div></div>
<div>Compared to other Asian noodle makers, Indofood is the second cheapest in PER (after Ottogi), second-highest gross margin (after Nissin Foods), highest EBITDA, and Net income margin. While</div>
<div>
<p>compared to the EM consumer stocks, Indofood CBP is 48% cheaper in PER, 60% cheaper in EV/EBITDA, 72% cheaper in PBR, 4% higher in gross margin, 23% higher in EBITDA margin although net income margin is 3% lower. </p>
<p>The fact that Indofood CBP will be on the radar for Global EM consumer fund managers and potentially some ETFs at a cheaper valuation to the peers could bring some inflow, driving the multiples higher. </p>
<p>Indofood CBP is still trading at lower share price to pre-COVID-19 and still undervalued versus the other noodle makers and global EM staple peers by a wide margin. Buy. </p>
</div>


Devi Subhakesan mentioned in her report in Indofood CBP (ICBP IJ): US$ 3Bn Acqsn. Of Affiliate - Dizzy Valuation, Earnings Dilution that the deal is not exactly value-accretive for the shareholders due to the expensive multiples that the company pays and the overleveraged in the balance sheet that further burden the net income. The flip side is that as Angus Mackintosh mentioned in Indofood CBP Sukses (ICBP IJ) - Going Global with Instant Noodles is that it has expanded its horizon to outside Indonesia and becomes an Emerging Market Consumer Staple play. 

Compared to other Asian noodle makers, Indofood is the second cheapest in PER (after Ottogi), second-highest gross margin (after Nissin Foods), highest EBITDA, and Net income margin. While

compared to the EM consumer stocks, Indofood CBP is 48% cheaper in PER, 60% cheaper in EV/EBITDA, 72% cheaper in PBR, 4% higher in gross margin, 23% higher in EBITDA margin although net income margin is 3% lower. 
The fact that Indofood CBP will be on the radar for Global EM consumer fund managers and potentially some ETFs at a cheaper valuation to the peers could bring some inflow, driving the multiples higher. 
Indofood CBP is still trading at lower share price to pre-COVID-19 and still undervalued versus the other noodle makers and global EM staple peers by a wide margin. Buy. 


Indofood (ICBP): Undervalued and Will Attract New Types of Investors

<div>
<a href="https://www.smartkarma.com/entities/nissin-foods-holdings-co-ltd" target="_blank" rel="noopener">Nissin Foods (2897 JP)</a> and <a href="https://www.smartkarma.com/entities/toyo-suisan-kaisha-ltd" target="_blank" data-smartkarma-citation="entities:16752:1" rel="noopener">Toyo Suisan (2875 JP)</a> share 40% and 20%, respectively, of Japan’s ¥607 billion instant noodle market which has seen compound average volume growth of 0.7% over the last ten years. Cup-type instant noodles has grown 1.5% by volume, while the bagged instant noodles have declined by 1.1%.</div>
<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/140/833/original/image_13870583021592490736757.png?1592490735" class="editor-image img-responsive" data-smartkarma-image-id="140833"></figure>
Source: Company Disclosures</div>
<div>Globally, Japan has the sixth-highest per capita instant noodles consumption at 3.7 servings a month - behind South Korea, Vietnam, Indonesia, Thailand and Nepal. Demographics and increasing health awareness are likely to constrain future volume growth and pricing is becoming an increasingly important factor. Nissin, and to a lesser extent, and Toyo Suisan, have increased average unit prices by introducing new products and flavours. Additionally, the average price of cup-type noodles is 61% higher than bagged instant noodles.</div>
<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/140/834/original/image_88461963631592490839479.png?1592490838" class="editor-image img-responsive" data-smartkarma-image-id="140834"></figure>
Source: Company Disclosures</div>
<p>Nissin and Toyo Suisan are currently trading at the higher end of their respective valuation ranges, Therefore, we are reluctant to recommend a long position in either company, however, a short position in Toyo Suisan could be considered given the prospect of continued margin deterioration in the domestic instant noodles segment over the next few years.</p>


Nissin Foods (2897 JP) and Toyo Suisan (2875 JP) share 40% and 20%, respectively, of Japan’s ¥607 billion instant noodle market which has seen compound average volume growth of 0.7% over the last ten years. Cup-type instant noodles has grown 1.5% by volume, while the bagged instant noodles have declined by 1.1%.


Source: Company Disclosures
Globally, Japan has the sixth-highest per capita instant noodles consumption at 3.7 servings a month - behind South Korea, Vietnam, Indonesia, Thailand and Nepal. Demographics and increasing health awareness are likely to constrain future volume growth and pricing is becoming an increasingly important factor. Nissin, and to a lesser extent, and Toyo Suisan, have increased average unit prices by introducing new products and flavours. Additionally, the average price of cup-type noodles is 61% higher than bagged instant noodles.


Source: Company Disclosures
Nissin and Toyo Suisan are currently trading at the higher end of their respective valuation ranges, Therefore, we are reluctant to recommend a long position in either company, however, a short position in Toyo Suisan could be considered given the prospect of continued margin deterioration in the domestic instant noodles segment over the next few years.

Evolving Competition in Japan's Instant Noodles Market: Toyo Suisan Vs Nissin Foods

<ul>
<li>Japanese consumer goods company <a href="https://www.smartkarma.com/entities/meiji-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:15996:1" rel="noopener">Meiji Holdings (2269 JP)</a> issued a <a href="https://www.release.tdnet.info/inbs/ek/140120200611442767.pdf" target="_blank" rel="noopener">press release</a> on Friday (12<sup>th</sup> June 2020) stating that the company is considering a stock split to boost liquidity and capital injection by investors.</li>
<li>The company previously conducted a two for one stock split on 1<sup>st</sup> October 2015. The share price rallied as much as 17.9% in the two days following Meiji’s announcement of its 2015 stock split.</li>
<li>We believe Meiji had genuine reasons for its previous stock split, whereas the explanation for the current considering stock split is not convincing. We explain our reasons below.</li>
</ul>


Japanese consumer goods company Meiji Holdings (2269 JP) issued a press release on Friday (12th June 2020) stating that the company is considering a stock split to boost liquidity and capital injection by investors.
The company previously conducted a two for one stock split on 1st October 2015. The share price rallied as much as 17.9% in the two days following Meiji’s announcement of its 2015 stock split.
We believe Meiji had genuine reasons for its previous stock split, whereas the explanation for the current considering stock split is not convincing. We explain our reasons below.


Meiji Holdings: Considering a Stock Split

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/848/original/2020-05-12_05-39-47.png?1589229610" class="editor-image img-responsive" data-smartkarma-image-id="132848"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>NEW INTERIM LOW</strong> - As we have noted in earlier Insights in this series, only half of the companies with March year-ends are issuing forecasts for the current year. Of those that do, two-thirds are also providing forecasts for the six months to September 2020. As was the case in 2019, our Interim data series is a clear signal of the depth of this recession.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/853/original/2020-05-12_06-49-09.png?1589233760" class="editor-image img-responsive" data-smartkarma-image-id="132853"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/132/854/original/2020-05-12_06-49-50.png?1589233810" class="editor-image img-responsive" data-smartkarma-image-id="132854"></figure><div class="content-caption">Source • Japan Analytics</div><p>In the <strong>DETAIL</strong> below, we shall review the results, revisions and initial forecast announcements made by larger-cap (¥75b+) companies yesterday:-</p><ul>
<li>The balance between positive/neutral/negative of the <strong>238</strong> results announcements was <strong>103:17:118</strong>. The average change in Results Score was <strong>-0.8</strong>.</li>
<li>For the <strong>137</strong> revisions/initial forecasts, the split was <strong>46:12:79, </strong>and the average Revision Score was<strong> -5.4</strong>. Of the <strong>183</strong> companies declaring full-year results, <strong>52%</strong> made forecasts for the current year.</li>
<li>263 will announce on Monday, the largest of which by market capitalisation will be <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a>, and <a href="https://www.smartkarma.com/entities/daikin-industries-ltd" target="_blank" data-smartkarma-citation="entities:16696:1" rel="noopener">Daikin (6367 JP)</a>.</li>
<li>Monday's 'best' and 'worst' scoring results were from  <a href="https://www.smartkarma.com/entities/nissin-foods-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:12548:1" rel="noopener">Nissin Foods (2897 JP)</a>  and amusement centre operator <a href="https://www.smartkarma.com/entities/round-one-corp" target="_blank" data-smartkarma-citation="entities:7057:1" rel="noopener">Round One (4680 JP)</a>, respectively. </li>
</ul>

Source • Japan AnalyticsNEW INTERIM LOW - As we have noted in earlier Insights in this series, only half of the companies with March year-ends are issuing forecasts for the current year. Of those that do, two-thirds are also providing forecasts for the six months to September 2020. As was the case in 2019, our Interim data series is a clear signal of the depth of this recession.Source • Japan AnalyticsIn the DETAIL below, we shall review the results, revisions and initial forecast announcements made by larger-cap (¥75b+) companies yesterday:-
The balance between positive/neutral/negative of the 238 results announcements was 103:17:118. The average change in Results Score was -0.8.
For the 137 revisions/initial forecasts, the split was 46:12:79, and the average Revision Score was -5.4. Of the 183 companies declaring full-year results, 52% made forecasts for the current year.
263 will announce on Monday, the largest of which by market capitalisation will be Toyota Motor (7203 JP), Honda Motor (7267 JP), and Daikin (6367 JP).
Monday's 'best' and 'worst' scoring results were from  Nissin Foods (2897 JP)  and amusement centre operator Round One (4680 JP), respectively. 


🇯🇵 JAPAN • Results & Revisions 11th May - Nissin, Seria, Mitsubishi Electric, Asahi Group

Japan

NISSIN FOODS HOLDINGS CO.,LTD. produces instant noodle and processed food products.  The Company also develops pharmaceuticals.  NISSIN FOODS operates production facilities in overseas countries including Hong Kong, India, U.S., Singapore, and other countries.

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Nissin Foods Holdings (2897 JP)

Fuji Oil In Itochu's Industry Consolidation Plans?

Last week, the Nihon Keizai Shimbun reported that the US private equity firm Carlyle Group intends to invest over ¥1.0 trillion in Japan over the...

Oshadhi Kumarasiri

Indofood (ICBP): Undervalued and Will Attract New Types of Investors

Devi Subhakesan mentioned in her report in Indofood CBP (ICBP IJ): US$ 3Bn Acqsn. Of Affiliate - Dizzy Valuation, Earnings Dilution that the deal...

Henry Soediarko

Evolving Competition in Japan's Instant Noodles Market: Toyo Suisan Vs Nissin Foods

Nissin Foods (2897 JP) and Toyo Suisan (2875 JP) share 40% and 20%, respectively, of Japan’s ¥607 billion instant noodle market which has seen...

Oshadhi Kumarasiri

Meiji Holdings: Considering a Stock Split

Japanese consumer goods company Meiji Holdings (2269 JP) issued a press release on Friday (12th June 2020) stating that the company is considering...

Oshadhi Kumarasiri

🇯🇵 JAPAN • Results & Revisions 11th May - Nissin, Seria, Mitsubishi Electric, Asahi Group

NEW INTERIM LOW - As we have noted in earlier Insights in this series, only half of the companies with March year-ends are issuing forecasts for...

Campbell Gunn

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