Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

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

On the face of it, Rohm's 1Q results were surprisingly good. Despite the negative economic impact of COVID-19, sales declined by only 3% from the previous quarter and operating profit nearly doubled as costs declined across the board. But management is guiding for the evaporation of these gains in 2Q. Sales are expected to decline further, while depreciation and R&amp;D expenses rise. The auto and other industries that use the company's semiconductor products have started to recover, but inventories are excessive.We expect sequential improvement in 2H and accelerated growth next year, but it is likely to take at least three years to regain the peak sales and profit levels reached in FY Mar-18 and FY Mar-19. Rohm's leading position in SiC power devices used in electric vehicles should drive the recovery. On a long-term view, projected valuations look attractive. In particular, applying Campbell Gunn's new metric, EV/POP (peak operating profit) to our forecast suggests that patient investors could be rewarded with a doubling of the current share price. <a href="https://www.smartkarma.com/insights/japan-stock-picking-with-peak-ev-op-multiples-introducing-ev-pop" target="_blank" data-smartkarma-citation="insights:42572" rel="noopener">🇯🇵 JAPAN • Stock Picking with 'Peak' EV/OP Multiples - Introducing EV/POP</a>.

On the face of it, Rohm's 1Q results were surprisingly good. Despite the negative economic impact of COVID-19, sales declined by only 3% from the previous quarter and operating profit nearly doubled as costs declined across the board. But management is guiding for the evaporation of these gains in 2Q. Sales are expected to decline further, while depreciation and R&amp;D expenses rise. The auto and other industries that use the company's semiconductor products have started to recover, but inventories are excessive.We expect sequential improvement in 2H and accelerated growth next year, but it is likely to take at least three years to regain the peak sales and profit levels reached in FY Mar-18 and FY Mar-19. Rohm's leading position in SiC power devices used in electric vehicles should drive the recovery. On a long-term view, projected valuations look attractive. In particular, applying Campbell Gunn's new metric, EV/POP (peak operating profit) to our forecast suggests that patient investors could be rewarded with a doubling of the current share price. 🇯🇵 JAPAN • Stock Picking with 'Peak' EV/OP Multiples - Introducing EV/POP.

Rohm (6963): Weak 2Q Before Long-Term Recovery

'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/000/139/255/original/2020-06-11_08-36-54.png?1591832240" class="editor-image img-responsive" data-smartkarma-image-id="139255"></figure><div class="content-caption">Source: Japan Analytics</div>STRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through the current euphoria and assess where business risk is concentrated among larger Japanese companies. According to Tokyo Shoko Research, 171 listed Japanese firms have raised nearly ¥10 trillion in new funds to weather COVID-19.ALTMAN Z-SCORES - The first Insight will update our earlier Who's<a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-2-altman-z-score" target="_blank" data-smartkarma-citation="insights:37316" rel="noopener"> Swimming Naked?</a> Insight and focus on the Altman Z-Score as updated for the most recent quarterly results for both manufacturing and non-manufacturing companies.  In each category, ee will look at both the companies that are below Altman's 'distress' levels and those companies that have the most significant negative deviation from their seven-year average score. Only six of the bottom-thirty manufacturing and five of the bottom-thirty manufacturing companies have outperformed over one year. Many are already Oversold and offer potential value opportunities -as with <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)</a> which is now as distressed as when Carlos Ghosn first arrived.  QUASI-FINANCIAL FIRMS - The Z-Score methodology does not work for financial firms. Accordingly, 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 AnalyticsSTRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through the current euphoria and assess where business risk is concentrated among larger Japanese companies. According to Tokyo Shoko Research, 171 listed Japanese firms have raised nearly ¥10 trillion in new funds to weather COVID-19.ALTMAN Z-SCORES - The first Insight will update our earlier Who's Swimming Naked? Insight and focus on the Altman Z-Score as updated for the most recent quarterly results for both manufacturing and non-manufacturing companies.  In each category, ee will look at both the companies that are below Altman's 'distress' levels and those companies that have the most significant negative deviation from their seven-year average score. Only six of the bottom-thirty manufacturing and five of the bottom-thirty manufacturing companies have outperformed over one year. Many are already Oversold and offer potential value opportunities -as with Nissan Motor (7201 JP) which is now as distressed as when Carlos Ghosn first arrived.  QUASI-FINANCIAL FIRMS - The Z-Score methodology does not work for financial firms. Accordingly, 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 1 - Altman Z-Scores

<ul>
<li>Sales fell short of expectations in FY Mar-20, but operating and net profit were above guidance due to a 16% reduction in R&amp;D expenses. </li>
<li>Red ink was avoided in 4Q, but the company is probably losing money now as the full force of the COVID-19 pandemic undercuts demand for automotive and industrial-use semiconductors. </li>
<li>High gearing to capacity utilization points to a V-shaped recovery when economies reopen and demand for the company's ICs and discrete semiconductors rebounds.</li>
<li>The balance sheet is very strong and management plans to maintain the dividend. We remain positive on Rohm as a long-term investment.</li>
</ul>


Sales fell short of expectations in FY Mar-20, but operating and net profit were above guidance due to a 16% reduction in R&amp;D expenses. 
Red ink was avoided in 4Q, but the company is probably losing money now as the full force of the COVID-19 pandemic undercuts demand for automotive and industrial-use semiconductors. 
High gearing to capacity utilization points to a V-shaped recovery when economies reopen and demand for the company's ICs and discrete semiconductors rebounds.
The balance sheet is very strong and management plans to maintain the dividend. We remain positive on Rohm as a long-term investment.


Rohm (6963 JP): No Guidance but History Points to V-Shaped Recovery

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. 

As analysts and economists try to figure out how deep and how long the C0VID-19 recession will last, it is worth keeping in mind that Rohm's 20-year project to develop silicon carbide (SiC) power devices is finally paying off. Rohm had an estimated 23% of this market in 2018 and its SiC device sales could triple over the coming five years, in our estimation, with rising demand for electric vehicle and industrial applications.Through its German subsidiary SiCrystal, Rohm is also a leading producer of SiC wafers. It recently announced a multi-year agreement to supply STMicroelectronics, another maker of SiC devices.Rohm's balance sheet should be strong enough to ride out the current crisis. At the end of Dec-19, the company had ¥326 billion in cash, most of its ¥41 billion in debt was in the form of zero coupon CBs, and net cash was 38% of equity. The current ratio was 9.6x and the quick ratio 7.6x. At the end of March, Rohm had completed just over half of a 10 million share buy-back program aimed at reducing the number of shares outstanding by 9.6%.<div>
In the meantime, Rohm has probably fallen into the red. If Japan, Europe and America follow the Chinese example and start going back to work over the next few months, cost cutting could enable the company to eke out a small profit in FY Mar-21 as a whole. Assuming no relapse, we would expect profits to regain last year's level in FY Mar-22.
The long-term outlook is encouraging. In the short run, recent lows could be retested. FY Mar-20 results are scheduled to be released on May 11. 
</div>

As analysts and economists try to figure out how deep and how long the C0VID-19 recession will last, it is worth keeping in mind that Rohm's 20-year project to develop silicon carbide (SiC) power devices is finally paying off. Rohm had an estimated 23% of this market in 2018 and its SiC device sales could triple over the coming five years, in our estimation, with rising demand for electric vehicle and industrial applications.Through its German subsidiary SiCrystal, Rohm is also a leading producer of SiC wafers. It recently announced a multi-year agreement to supply STMicroelectronics, another maker of SiC devices.Rohm's balance sheet should be strong enough to ride out the current crisis. At the end of Dec-19, the company had ¥326 billion in cash, most of its ¥41 billion in debt was in the form of zero coupon CBs, and net cash was 38% of equity. The current ratio was 9.6x and the quick ratio 7.6x. At the end of March, Rohm had completed just over half of a 10 million share buy-back program aimed at reducing the number of shares outstanding by 9.6%.
In the meantime, Rohm has probably fallen into the red. If Japan, Europe and America follow the Chinese example and start going back to work over the next few months, cost cutting could enable the company to eke out a small profit in FY Mar-21 as a whole. Assuming no relapse, we would expect profits to regain last year's level in FY Mar-22.
The long-term outlook is encouraging. In the short run, recent lows could be retested. FY Mar-20 results are scheduled to be released on May 11. 


Rohm (6963 JP): Looking to Recovery with SiC Technology and a 10% Buyback

Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

<ul type="disc">
<li>
<a href="https://www.smartkarma.com/entities/rohm-co-ltd" target="_blank" data-smartkarma-citation="entities:2953:1" rel="noopener">Rohm Co Ltd (6963 JP)</a> mainly manufactures ICs and Discrete Semiconductors.</li>
<li>The company has been experiencing a decline in OP and revenue during recent quarters, which, however, is more industry-specific, and seems temporary (until demand across end markets recovers).</li>
</ul>
<ul>
<li>In our opinion, the stock is just starting to price in possible growth, and an attractive upside of 50%+ remains over the next year if top-line growth results in the margin upside that our marginal profitability analysis suggests.</li>
<li>Our expectations are based on the following catalysts:
<ul>
<li>Demand across end markets likely to improve over the next year given the emergence of 5G and the growing demand for automotive semiconductors- we expect a U-shaped recovery in revenue, starting next FY.</li>
<li>The company’s ability to improve margins seems quite evident, as our quantamental analysis implies.</li>
</ul>
</li>
</ul>
<ul class="">
<li>On the other end, we also feel that with the support of its large share buyback, downside risks are limited, giving investors an asymmetric opportunity on ROHM</li>
</ul>



Rohm Co Ltd (6963 JP) mainly manufactures ICs and Discrete Semiconductors.
The company has been experiencing a decline in OP and revenue during recent quarters, which, however, is more industry-specific, and seems temporary (until demand across end markets recovers).


In our opinion, the stock is just starting to price in possible growth, and an attractive upside of 50%+ remains over the next year if top-line growth results in the margin upside that our marginal profitability analysis suggests.
Our expectations are based on the following catalysts:

Demand across end markets likely to improve over the next year given the emergence of 5G and the growing demand for automotive semiconductors- we expect a U-shaped recovery in revenue, starting next FY.
The company’s ability to improve margins seems quite evident, as our quantamental analysis implies.




On the other end, we also feel that with the support of its large share buyback, downside risks are limited, giving investors an asymmetric opportunity on ROHM


2020 High Conviction: ROHM- Potential for Margin Expansion; 5G and CASE Are Key Demand Drivers

Japan

ROHM COMPANY LIMITED manufactures custom linear integrated circuits and semiconductor devices for use primarily in consumer electronics.  The Company has plants and sales offices worldwide.  Rohm's subsidiaries include Wako Electric and Apollo Electronics.

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ROHM Co Ltd (6963 JP)

Rohm (6963): Weak 2Q Before Long-Term Recovery

On the face of it, Rohm's 1Q results were surprisingly good. Despite the negative economic impact of COVID-19, sales declined by only 3% from the...

Scott Foster

🇯🇵 JAPAN - Stress Tests Part 1 - Altman Z-Scores

STRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through...

Campbell Gunn

Rohm (6963 JP): No Guidance but History Points to V-Shaped Recovery

Sales fell short of expectations in FY Mar-20, but operating and net profit were above guidance due to a 16% reduction in R&D expenses. Red...

Scott Foster

Rohm (6963 JP): Looking to Recovery with SiC Technology and a 10% Buyback

As analysts and economists try to figure out how deep and how long the C0VID-19 recession will last, it is worth keeping in mind that Rohm's...

Scott Foster

2020 High Conviction: ROHM- Potential for Margin Expansion; 5G and CASE Are Key Demand Drivers

Rohm Co Ltd (6963 JP) mainly manufactures ICs and Discrete Semiconductors. The company has been experiencing a decline in OP and revenue during...

Aqila Ali

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