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.

Equity Bottom-Up

As lockdowns and restrictions eased towards the end of the second quarter and into the third quarter, Japanese cosmetics companies are expected to stage a comeback in 3Q2020. As a result, all major Japanese cosmetics companies (excluding Pola Orbis, who is struggling to regain its mojo) are trading near their historical high FY+2 EV/EBIT multiples.Main overseas markets have performed exceptionally well during the July and August 2020 months. Japan’s cosmetics exports to main countries grew 23% year-on-year during the July-August period compared to 4.5% in 2Q20.However, domestic sales during July and August 2020 remained 25-30% lower than the pre-pandemic level. We believe the immediate domestic cosmetics sales recovery could be over. The 25-30% loss of domestic demand is predominantly a result of non-existent inbound sales while behavioural changes due to COVID-19 may have also had a small impact. We expect the behavioural changes to have a lasting impact on domestic demand. However, as travel restrictions are lifted inbound demand could return and warrant a sharp increase in domestic sales.In this insight, we analyse Japan’s cosmetic industry using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

As lockdowns and restrictions eased towards the end of the second quarter and into the third quarter, Japanese cosmetics companies are expected to stage a comeback in 3Q2020. As a result, all major Japanese cosmetics companies (excluding Pola Orbis, who is struggling to regain its mojo) are trading near their historical high FY+2 EV/EBIT multiples.Main overseas markets have performed exceptionally well during the July and August 2020 months. Japan’s cosmetics exports to main countries grew 23% year-on-year during the July-August period compared to 4.5% in 2Q20.However, domestic sales during July and August 2020 remained 25-30% lower than the pre-pandemic level. We believe the immediate domestic cosmetics sales recovery could be over. The 25-30% loss of domestic demand is predominantly a result of non-existent inbound sales while behavioural changes due to COVID-19 may have also had a small impact. We expect the behavioural changes to have a lasting impact on domestic demand. However, as travel restrictions are lifted inbound demand could return and warrant a sharp increase in domestic sales.In this insight, we analyse Japan’s cosmetic industry using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

Japanese Cosmetics Stats: Absent Inbound Demand Pauses Domestic Recovery, Exports Grow Double-Digits

'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/000/158/693/original/2020-09-14_09-50-37.png?1600044664" class="editor-image img-responsive" data-smartkarma-image-id="158693"></figure><div class="content-caption">Source for all charts &amp; tables except as stated: Japan Analytics</div>EQUITY-DRIVEN - Japan's aggregate Shareholders' Equity has appreciated by 45% since 2014 - an annual rate of 5.5% and has been one of the key achievements of the 'Abe era'. For the five years before 2012, Shareholders Equity was unchanged, buffeted by the 2008/9 financial crisis and the 3/11.  Although the equity market has responded well to the change in reserves, Japan's PBR has remained within a range of 1.05 to 1.38 over the last decade and is unchanged compared to 2010. In prior post-bubble 'lost' decades, the average PBR was 1.8 times. In other markets, the rise of intangible assets has called the use of Book/Price as a metric and the S&amp;P 500 PBR is now almost three times that of the Japan aggregate having bottomed at 1.78 in March 2009.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/694/original/File%202020-09-14%2010%2007%2037.jpeg?1600045681" class="editor-image img-responsive" data-smartkarma-image-id="158694"></figure><div class="content-caption">Source: multpl.com</div>BOOK VALUE PER SHARE - In this Insight, we shall look at Japan's larger-cap companies (current market value &gt;¥100 billion) through the 'lens' of book value per share. Our focus will be less on the 'winners' and 'losers' than on those companies that have seen the least change in 'BVPS' over the last seven years. Our share count excludes treasury shares which is to the benefit of companies such as <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (9432 JP)</a> which has seen a 20% reduction in Net Shares Outstanding, but only a 9% increase in Shareholders' Equity. A BVPS growth metric does, however, flatter serial issuers of equity with declining share prices, such as <a href="https://www.smartkarma.com/entities/sosei-group-corp" target="_blank" data-smartkarma-citation="entities:770:1" rel="noopener">Sosei (4565 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/696/original/2020-09-14_10-26-48.png?1600046818" class="editor-image img-responsive" data-smartkarma-image-id="158696"></figure>WINNERS - As many may ask and for the record, our 'winning' thirty companies contains many of Japan's best-performing businesses and 'priciest 'stocks, such as <a href="https://www.smartkarma.com/entities/monotaro-co-ltd" target="_blank" data-smartkarma-citation="entities:15441:1" rel="noopener">Monotaro (3064 JP)</a>, <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 (2413 JP)</a>, <a href="https://www.smartkarma.com/entities/gmo-payment-gateway-inc" target="_blank" data-smartkarma-citation="entities:1492:1" rel="noopener">GMO Payment Gateway (3769 JP)</a>, and <a href="https://www.smartkarma.com/entities/kobe-bussan-co-ltd" target="_blank" data-smartkarma-citation="entities:4701:1" rel="noopener">Kobe Bussan (3038 JP)</a>. Some of the more surprising entries are <a href="https://www.smartkarma.com/entities/mixi-inc" target="_blank" data-smartkarma-citation="entities:602:1" rel="noopener">mixi (2121 JP)</a> and <a href="https://www.smartkarma.com/entities/tokyo-electric-power-co-inc" target="_blank" data-smartkarma-citation="entities:15457:1" rel="noopener">Tokyo Electric Power (9501 JP)</a>.  As an equally-weighted portfolio, this group has outperformed by 30% over one year and by 11% over the last three months.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/697/original/2020-09-14_10-33-13.png?1600047204" class="editor-image img-responsive" data-smartkarma-image-id="158697"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/698/original/2020-09-14_10-33-41.png?1600047231" class="editor-image img-responsive" data-smartkarma-image-id="158698"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/701/original/2020-09-14_10-47-56.png?1600048087" class="editor-image img-responsive" data-smartkarma-image-id="158701"></figure>LOSERS - Our list of losers, who have collectively underperformed by 9% over one year, have many of Japan's weaker business models (shipping, oil &amp; gas, paper, copiers, gaming machines. The list also features some of the less-astute management 'teams' (<a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a>, <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan (7201 JP)</a>, <a href="https://www.smartkarma.com/entities/kirin-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:16977:1" rel="noopener">Kirin (2503 JP)</a>, <a href="https://www.smartkarma.com/entities/lixil-group-corp" target="_blank" data-smartkarma-citation="entities:454:1" rel="noopener">Lixil (5938 JP)</a>, and <a href="https://www.smartkarma.com/entities/aeon-co-ltd" target="_blank" data-smartkarma-citation="entities:3:1" rel="noopener">Aeon (8267 JP)</a>).  Also among the latter are two medical-related business - the now remained <a href="https://www.smartkarma.com/entities/h-u-group-holdings-inc" target="_blank" data-smartkarma-citation="entities:16580:1" rel="noopener">H.U. Group (4544 JP)</a> (formerly Miraca) and recent Bain PE target <a href="https://www.smartkarma.com/entities/nichii-gakkan-co" target="_blank" data-smartkarma-citation="entities:6790:1" rel="noopener">Nichii Gakkan (9792 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/706/original/2020-09-14_10-57-45.png?1600048692" class="editor-image img-responsive" data-smartkarma-image-id="158706"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/158/707/original/2020-09-14_10-59-22.png?1600048774" class="editor-image img-responsive" data-smartkarma-image-id="158707"></figure>In the DETAIL section below, we all review the large companies that have seen the least change in BVPS over the last seven years and those with the lowest BVPS volatility over the same period. Our lists contain quite a few surprises.

Source for all charts &amp; tables except as stated: Japan AnalyticsEQUITY-DRIVEN - Japan's aggregate Shareholders' Equity has appreciated by 45% since 2014 - an annual rate of 5.5% and has been one of the key achievements of the 'Abe era'. For the five years before 2012, Shareholders Equity was unchanged, buffeted by the 2008/9 financial crisis and the 3/11.  Although the equity market has responded well to the change in reserves, Japan's PBR has remained within a range of 1.05 to 1.38 over the last decade and is unchanged compared to 2010. In prior post-bubble 'lost' decades, the average PBR was 1.8 times. In other markets, the rise of intangible assets has called the use of Book/Price as a metric and the S&amp;P 500 PBR is now almost three times that of the Japan aggregate having bottomed at 1.78 in March 2009.Source: multpl.comBOOK VALUE PER SHARE - In this Insight, we shall look at Japan's larger-cap companies (current market value &gt;¥100 billion) through the 'lens' of book value per share. Our focus will be less on the 'winners' and 'losers' than on those companies that have seen the least change in 'BVPS' over the last seven years. Our share count excludes treasury shares which is to the benefit of companies such as NTT (9432 JP) which has seen a 20% reduction in Net Shares Outstanding, but only a 9% increase in Shareholders' Equity. A BVPS growth metric does, however, flatter serial issuers of equity with declining share prices, such as Sosei (4565 JP).WINNERS - As many may ask and for the record, our 'winning' thirty companies contains many of Japan's best-performing businesses and 'priciest 'stocks, such as Monotaro (3064 JP), M3 (2413 JP), GMO Payment Gateway (3769 JP), and Kobe Bussan (3038 JP). Some of the more surprising entries are mixi (2121 JP) and Tokyo Electric Power (9501 JP).  As an equally-weighted portfolio, this group has outperformed by 30% over one year and by 11% over the last three months.LOSERS - Our list of losers, who have collectively underperformed by 9% over one year, have many of Japan's weaker business models (shipping, oil &amp; gas, paper, copiers, gaming machines. The list also features some of the less-astute management 'teams' (Toshiba (6502 JP), Nissan (7201 JP), Kirin (2503 JP), Lixil (5938 JP), and Aeon (8267 JP)).  Also among the latter are two medical-related business - the now remained H.U. Group (4544 JP) (formerly Miraca) and recent Bain PE target Nichii Gakkan (9792 JP).In the DETAIL section below, we all review the large companies that have seen the least change in BVPS over the last seven years and those with the lowest BVPS volatility over the same period. Our lists contain quite a few surprises.

🇯🇵 Japan • Every Shareholder Left Behind - The Book Value Per Share Metric

<a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a> first-quarter revenue and operating income exceeded consensus estimates by 3.1% and 122%, respectively, but declined by 19% and 44% year-on-year. Cosmetics revenue and profits declined by 24% and 59%, while the Nutritional Supplements segment saw revenue declined 20%, but operating profits grew by 20% year-on-year. Although the company did not change its initial full-year forecasts due to uncertainties over inbound demand, interim revenue and operating profit forecast were increased by ¥0.65 and ¥1.3 billion, respectively.
Of greater interest, FANCL provided an update on its expansion in China, a venture which could eventually lead to the company reaching the scale of <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" rel="noopener">Shiseido (4911 JP)</a> or <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" rel="noopener">Kao (4452 JP)</a>.

Fancl Corp (4921 JP) first-quarter revenue and operating income exceeded consensus estimates by 3.1% and 122%, respectively, but declined by 19% and 44% year-on-year. Cosmetics revenue and profits declined by 24% and 59%, while the Nutritional Supplements segment saw revenue declined 20%, but operating profits grew by 20% year-on-year. Although the company did not change its initial full-year forecasts due to uncertainties over inbound demand, interim revenue and operating profit forecast were increased by ¥0.65 and ¥1.3 billion, respectively.
Of greater interest, FANCL provided an update on its expansion in China, a venture which could eventually lead to the company reaching the scale of Shiseido (4911 JP) or Kao (4452 JP).

Under-Appreciated China Expansion:  Fancl Now Our Preferred Japanese Cosmetics Stock

<a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a>, will announce second-quarter results on the 6th August. In this Insight, we shall use recent METI and Ministry of Finance domestic cosmetics industry data to preview Shiseido’s results and suggest that a downward revision to the company’s initial revenue and profit forecasts made in early February is imminent.

Shiseido Company (4911 JP), will announce second-quarter results on the 6th August. In this Insight, we shall use recent METI and Ministry of Finance domestic cosmetics industry data to preview Shiseido’s results and suggest that a downward revision to the company’s initial revenue and profit forecasts made in early February is imminent.

Shiseido(4911 JP): Downward Revision Imminent

More than six months on from the initial outbreak, the spread of COVID-19 is still gaining momentum with more than 16 million recorded cases and 600,000 deaths worldwide.
<a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a> downplayed the impact of COVID-19 on quarterly results initially. However, 2Q20 results, released yesterday (29th July 2020) was a reality check for Kao, possibly the most resilient Japanese cosmetic company among peers <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" data-smartkarma-citation="entities:5718:1" rel="noopener">Shiseido Company (4911 JP)</a>, <a href="https://www.smartkarma.com/entities/kose-corp" target="_blank" data-smartkarma-citation="entities:18009:1" rel="noopener">Kose Corp (4922 JP)</a>, <a href="https://www.smartkarma.com/entities/pola-orbis-holdings-inc" target="_blank" data-smartkarma-citation="entities:2287:1" rel="noopener">Pola Orbis Holdings (4927 JP)</a> and <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a>.
It appears that Kao has overestimated its resilience, especially in a time where peers were much more sceptical. Kao’s significantly weak 2Q20 results compared to its expectations as of April 2020 has prompted the company to lower its 2020 revenue and OP guidance by 5% and 14% respectively from the lower end of the April 2020 guidance range.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/831/original/image_93425590421596077376146.png?1596077381" width="595" height="358" class="editor-image img-responsive" data-smartkarma-image-id="148831"></figure>
<div class="content-caption">Source: Company Disclosures</div>

More than six months on from the initial outbreak, the spread of COVID-19 is still gaining momentum with more than 16 million recorded cases and 600,000 deaths worldwide.
Kao Corp (4452 JP) downplayed the impact of COVID-19 on quarterly results initially. However, 2Q20 results, released yesterday (29th July 2020) was a reality check for Kao, possibly the most resilient Japanese cosmetic company among peers Shiseido Company (4911 JP), Kose Corp (4922 JP), Pola Orbis Holdings (4927 JP) and Fancl Corp (4921 JP).
It appears that Kao has overestimated its resilience, especially in a time where peers were much more sceptical. Kao’s significantly weak 2Q20 results compared to its expectations as of April 2020 has prompted the company to lower its 2020 revenue and OP guidance by 5% and 14% respectively from the lower end of the April 2020 guidance range.

Source: Company Disclosures

Kao 2Q20 Results: Expecting Worse in the Third Quarter

Japan

POLA ORBIS HOLDINGS INC. develops, manufactures and markets cosmetic products, centering in skincare  products. Under its multi-brand strategy, the Company holds nine cosmetic brands including POLA, prestige skincare brand, ORBIS, oil-free skincare brand, H2O PLUS and Jurlique.

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Pola Orbis Holdings (4927 JP)

Japanese Cosmetics Stats: Absent Inbound Demand Pauses Domestic Recovery, Exports Grow Double-Digits

Japan’s cosmetics exports to main countries grew 23% year-on-year during the July-August period compared to 4.5% in 2Q20.

Oshadhi Kumarasiri

Under-Appreciated China Expansion: Fancl Now Our Preferred Japanese Cosmetics Stock

Fancl Corp (4921 JP) first-quarter revenue and operating income exceeded consensus estimates by 3.1% and 122%, respectively, but declined by 19%...

Oshadhi Kumarasiri

Shiseido(4911 JP): Downward Revision Imminent

Shiseido Company (4911 JP), will announce second-quarter results on the 6th August. In this Insight, we shall use recent METI and Ministry of...

Oshadhi Kumarasiri

Kao 2Q20 Results: Expecting Worse in the Third Quarter

More than six months on from the initial outbreak, the spread of COVID-19 is still gaining momentum with more than 16 million recorded cases and...

Oshadhi Kumarasiri

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52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Japanese Cosmetics Stats: Absent Inbound Demand Pauses Domestic Recovery, Exports Grow Double-Digits

Japan’s cosmetics exports to main countries grew 23% year-on-year during the July-August period compared to 4.5% in 2Q20.

Oshadhi Kumarasiri

🇯🇵 Japan • Every Shareholder Left Behind - The Book Value Per Share Metric

EQUITY-DRIVEN - Japans

Campbell Gunn

Under-Appreciated China Expansion: Fancl Now Our Preferred Japanese Cosmetics Stock

Fancl Corp (4921 JP) first-quarter revenue and operating income exceeded consensus estimates by 3.1% and 122%, respectively, but declined by 19%...

Oshadhi Kumarasiri

Shiseido(4911 JP): Downward Revision Imminent

Shiseido Company (4911 JP), will announce second-quarter results on the 6th August. In this Insight, we shall use recent METI and Ministry of...

Oshadhi Kumarasiri

Kao 2Q20 Results: Expecting Worse in the Third Quarter

More than six months on from the initial outbreak, the spread of COVID-19 is still gaining momentum with more than 16 million recorded cases and...

Oshadhi Kumarasiri