Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

Softbank-backed low-earth orbit (LEO) satellite operator OneWeb has filed for bankruptcy, the first of the Vision Fund companies to go down that route. We don't see this as a Covid-19 event but rather a more prosaic story of a start-up with insufficient funding and growing competition. We expect that Softbank's massive restructuring program announced last week was partially driven by anticipation of announcements like this and it is likely that more are coming.  Over time, the money Softbank will put to work buying back shares and shoring up its balance sheet should offset concerns on private equity but there will be volatility.

Softbank-backed low-earth orbit (LEO) satellite operator OneWeb has filed for bankruptcy, the first of the Vision Fund companies to go down that route. We don't see this as a Covid-19 event but rather a more prosaic story of a start-up with insufficient funding and growing competition. We expect that Softbank's massive restructuring program announced last week was partially driven by anticipation of announcements like this and it is likely that more are coming.  Over time, the money Softbank will put to work buying back shares and shoring up its balance sheet should offset concerns on private equity but there will be volatility.

Softbank Group: OneWeb Bankruptcy Is First of Many but This One Is Not Virus-Related

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Thematic (Sector/Industry)

The Japanese government and larger retailers are still gung-ho about cashless payment systems. Cash, which still makes up 60-70% of all transactions in Japan, is a major cost for larger retailers but cashless systems also come with a cost in terms of technology and fees, and smaller vendors are far less impressed so far despite government incentives.

The Japanese government and larger retailers are still gung-ho about cashless payment systems. Cash, which still makes up 60-70% of all transactions in Japan, is a major cost for larger retailers but cashless systems also come with a cost in terms of technology and fees, and smaller vendors are far less impressed so far despite government incentives.

Some Resistance to Cashless Payments in Japan

Last month, <a href="https://www.smartkarma.com/entities/mercari-inc" target="_blank" data-smartkarma-citation="entities:27149:1" rel="noopener">Mercari Inc (4385 JP)</a> announced a string of new initiatives to inject further momentum into its domestic CtoC business.
Mercari is often viewed as a threat by vendors and retailers of new product, although Mercari’s own survey results suggest that the ability to sell unwanted items increases the propensity to buy new ones.
Mercari will now offer its data on resales to brands and retailers to allow end-to-end tracking of a product’s lifecycle.
It also wants to incentivise Mercari users to visit stores to buy new product.
The net result should be strong collaborative ties with primary brands and retailers, helping both sides develop a compelling data set of product lifecycles from factory to second purchaser which should enhance Mercari's service levels and help it create an eco-system far more convenient and easy to use than competitors, giving it a significant advantage.
At the same time, Mercari's efforts to deepen its ties with <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> could lead to Merpay merging with Docomo's payment service to create a proper third major cashless payments alternative to PayPay and <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten's (4755 JP)</a> Rakuten Pay in Japan's rapidly consolidating cashless payments race.

Last month, Mercari Inc (4385 JP) announced a string of new initiatives to inject further momentum into its domestic CtoC business.
Mercari is often viewed as a threat by vendors and retailers of new product, although Mercari’s own survey results suggest that the ability to sell unwanted items increases the propensity to buy new ones.
Mercari will now offer its data on resales to brands and retailers to allow end-to-end tracking of a product’s lifecycle.
It also wants to incentivise Mercari users to visit stores to buy new product.
The net result should be strong collaborative ties with primary brands and retailers, helping both sides develop a compelling data set of product lifecycles from factory to second purchaser which should enhance Mercari's service levels and help it create an eco-system far more convenient and easy to use than competitors, giving it a significant advantage.
At the same time, Mercari's efforts to deepen its ties with NTT Docomo Inc (9437 JP) could lead to Merpay merging with Docomo's payment service to create a proper third major cashless payments alternative to PayPay and Rakuten's (4755 JP) Rakuten Pay in Japan's rapidly consolidating cashless payments race. 

Mercari Recruits Retailers and Brands to Exploit Data & Expand Markets

'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. 

Quantitative Analysis

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/342/original/2020-03-11_11-02-32.png?1583892183" class="editor-image img-responsive" data-smartkarma-image-id="122342"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/122/590/original/2020-03-12_07-42-03.png?1583966536" class="editor-image img-responsive" data-smartkarma-image-id="122590"></figure><div class="content-caption">Source • Japan Analytics</div>CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds,  we shall look at Cumulative Cash Flows. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual yuho and unaudited quarterly kessan tanshin reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-<ul>
<li>
Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.</li>
<li>
Investing Cash Flow - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.</li>
<li>
Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. </li>
<li>
Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.</li>
<li>
Financing Cash Flow - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.</li>
<li>Change in Cash - Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. </li>
</ul>EXCLUDED - Four companies have been excluded from our review as they have substantial financial subsidiaries - <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/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 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> which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in <a href="https://www.smartkarma.com/entities/japan-display-inc" target="_blank" data-smartkarma-citation="entities:8280:1" rel="noopener">Japan Display (6740 JP).</a><a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a>-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.<div class="content-highlight">In the DETAIL Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. </div>

Source • Japan AnalyticsCUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds,  we shall look at Cumulative Cash Flows. Our cash flow model is derived from the disclosed Balance Sheets and Statements of Comprehensive Income and balances to zero for every company for every comparable period. Variations in disclosure between the audited annual yuho and unaudited quarterly kessan tanshin reports, notably when the company is reporting under the weaker IFRS standard can result in unavoidable quarter-to-quarter variations. Consequently, our analysis will focus on year-on-year changes as of the most recent quarterly disclosure irrespective of fiscal year-end.  Our review will cover six principal cash flow metrics:-

Operating Cash Flow - Operating Cash Flow comprises all cash flow items relating to transactions with customers and suppliers except inventory cash flows.

Investing Cash Flow - Investing Cash Flow comprises cash flow to or from Fixed Assets and Inventories. Unlike GAAP Cash Flows Statements, It does not include investments in financial assets.

Inventory Cash Flow - A sub-set of Investing Cash Flow, inventory Cash Flow is the change in Inventory on the Balance Sheet. 

Free Cash Flow - Free Cash Flow the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow.

Financing Cash Flow - Financing Cash Flow comprises Debt &amp; Lease Liabilities, Investments and the taxation that is allocated to Financing Cash Flow. Debt &amp; Lease Liabilities includes changes in Short and Long-Term Debt and Lease Liabilities and Interest and Bond Issuance Expenses.' Investments' includes Interest &amp; Dividend Income, Purchases and Sales of Securities, Loans, Gains and Losses on Marketable Securities and Equity Earnings.
Change in Cash - Change in Cash is the sum of Free Cash Flow, Financing Cash Flow and Shareholder Cash Flow after including Minorities &amp; Adjustments. 
EXCLUDED - Four companies have been excluded from our review as they have substantial financial subsidiaries - Z Holdings (4689 JP), Rakuten (4755 JP), Sony (6758 JP), Japan Post (6178 JP) which distort their balance sheets. We have also excluded companies with a current market cap below ¥50b, although some exceptions have been made for abnormally large movements, such as those in Japan Display (6740 JP).Toshiba (6502 JP)-  As an example of our analysis, Toshiba has seen the largest reduction in Cash as a percentage of market value over the last twelve months of any large-cap Japanese company. Toshiba's cash balance has declined by ¥1.4 trillion since peaking in 2019-Q2 - 114% of the current market cap. 70% of the cash generated between 2018-Q4 and 2019-Q2 has been allocated to share repurchases, dividends and cash reduction. The company's net cash remains at a healthy 51% of market value and 43% of Shareholders' Equity; however, Cumulative Operating Cash Flow will fall below zero in the current quarter. There are few additional reductions in Fixed Assets and Inventories that can be sustained without irreparable damage. The logic of buying back shares in an entity that has negative residual returns is not clear to us. Despite the potential for a TOPIX re-inclusion 'bounce', fundamentally the stock should be avoided.In the DETAIL Section below, we shall look at the top (or bottom) thirty large-cap companies on each of the metric above scaled by market capitalisation. 

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

Equity Analyst, LightStream Research

Supun Walpola

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.

In this note, we take a deep dive into <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten Inc (4755 JP)</a>’s domestic e-commerce business.We see a clear difference between how both Rakuten and <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> are pursuing their traditional “goods” e-commerce businesses. Z seems to be still going after user growth, through acquisitions (such as ASKUL and ZOZO) and introduction of newer platforms (such as PayPay Mall and PayPay Flea Market). Rakuten, on the other hand, seems to be focused on monetising its existing users better. One way Rakuten plans to do this is through “in-housing” its merchant deliveries. In 2018, Rakuten introduced the Rakuten Super Logistics service, an end to end supply chain solution for e-commerce users. The service is expected to boost Rakuten’s margins by reducing its reliance on third-party logistics providers and by adding “an extra buck” to revenue through fees charged from both the merchant (through both pickup and warehousing services) and the customer (shipping/delivery costs). However, upfront investments in the logistics network seem to be eating into the e-commerce business bottom line, and by the looks of it, this seems unlikely to recover anytime soon.

In this note, we take a deep dive into Rakuten Inc (4755 JP)’s domestic e-commerce business.We see a clear difference between how both Rakuten and Z Holdings (4689 JP) are pursuing their traditional “goods” e-commerce businesses. Z seems to be still going after user growth, through acquisitions (such as ASKUL and ZOZO) and introduction of newer platforms (such as PayPay Mall and PayPay Flea Market). Rakuten, on the other hand, seems to be focused on monetising its existing users better. One way Rakuten plans to do this is through “in-housing” its merchant deliveries. In 2018, Rakuten introduced the Rakuten Super Logistics service, an end to end supply chain solution for e-commerce users. The service is expected to boost Rakuten’s margins by reducing its reliance on third-party logistics providers and by adding “an extra buck” to revenue through fees charged from both the merchant (through both pickup and warehousing services) and the customer (shipping/delivery costs). However, upfront investments in the logistics network seem to be eating into the e-commerce business bottom line, and by the looks of it, this seems unlikely to recover anytime soon.

Rakuten: Upfront Investments in Logistics and UI/UX Are Eating into E-Commerce Margins

Japan

Rakuten Group, Inc. provides Internet services. The Company offers Internet finance services which including "Rakuten Card" and "Rakuten Bank". Rakuten Group also provides digital content services including electronic book services.

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Rakuten (4755 JP)

Some Resistance to Cashless Payments in Japan

The Japanese government and larger retailers are still gung-ho about cashless payment systems. Cash, which still makes up 60-70% of all...

Michael Causton

Mercari Recruits Retailers and Brands to Exploit Data & Expand Markets

Last month, Mercari Inc (4385 JP) announced a string of new initiatives to inject further momentum into its domestic CtoC business. Mercari is...

Michael Causton

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds, ...

Campbell Gunn

Rakuten: Upfront Investments in Logistics and UI/UX Are Eating into E-Commerce Margins

In this note, we take a deep dive into Rakuten Inc (4755 JP)’s domestic e-commerce business.We see a clear difference between how both Rakuten and...

Supun Walpola

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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Softbank Group: OneWeb Bankruptcy Is First of Many but This One Is Not Virus-Related

Softbank-backed low-earth orbit (LEO) satellite operator OneWeb has filed for bankruptcy, the first of the Vision Fund companies to go down that...

Kirk Boodry

Some Resistance to Cashless Payments in Japan

The Japanese government and larger retailers are still gung-ho about cashless payment systems. Cash, which still makes up 60-70% of all...

Michael Causton

Mercari Recruits Retailers and Brands to Exploit Data & Expand Markets

Last month, Mercari Inc (4385 JP) announced a string of new initiatives to inject further momentum into its domestic CtoC business. Mercari is...

Michael Causton

🇯🇵 JAPAN • Who’s Swimming Naked? > Part 3: Cumulative Cash Flow

CUMULATIVE CASH FLOWS - In this third and final of our series on Japanese companies that might be compromised as the Covid-19 recession unfolds, ...

Campbell Gunn

Rakuten: Upfront Investments in Logistics and UI/UX Are Eating into E-Commerce Margins

In this note, we take a deep dive into Rakuten Inc (4755 JP)’s domestic e-commerce business.We see a clear difference between how both Rakuten and...

Supun Walpola