'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

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Neither "Murakami Fund" group company Office Support KK nor any other Murakami-affiliated company seems to have announced a Tender Offer for <a href="https://www.smartkarma.com/entities/toshiba-machine-co-ltd" target="_blank" data-smartkarma-citation="entities:7943:1" rel="noopener">Toshiba Machine (6104 JP)</a> on the 20th as promised. Instead, we jump right to the Tender Offer launch, as <a href="https://disclosure.edinet-fsa.go.jp/E01EW/BLMainController.jsp?uji.verb=W00Z1020initialize&amp;uji.bean=ek.bean.EKW00Z1020Bean&amp;TID=W00Z1020&amp;PID=W1E63041&amp;SESSIONKEY=1579573756181&amp;lgKbn=2&amp;dflg=0&amp;iflg=&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=S100HRXX" target="_blank" rel="noopener">disclosed</a> (Japanese only link) on EDINET this morning, by City Index Elevens KK which is 100% owned by two Murakami group companies.The Tender Offer is for a minimum of 3.5mm shares and a maximum of 7.5mm shares, and if successful at the top end, it will mean Murakami-affiliated companies will own a total of 43.82% of voting rights and 35.28% of shares outstanding (because they own a combined 3.076mm shares as of the launch of the Tender).This Tender Offer price is lower, and for a lower number of shares than I thought. The Tender Offer price of ¥3,456 is symbolic. The document says it is "about one time net assets." It is, in fact, exactly 1.00x book value as of 30 September, which was when <a href="https://www.smartkarma.com/entities/nuflare-technology-inc" target="_blank" data-smartkarma-citation="entities:9635:1" rel="noopener">Nuflare Technology (6256 JP)</a> was trading at a lower price (the Tender Offer was 55% higher than the end-Sep mark price on their balance sheet). By my calculations, ¥3,456/share is about 0.92-0.95x run-rate book value.This is a deliberately low hurdle set by Murakami-san, and he explicitly says so in the document. It is a gift to Toshiba Machine. He effectively suggests what the right answer is for Toshiba Machine to double ROE. And he invites Toshiba Machine to work hand-in-hand with him to get it done.<div class="content-highlight">I URGE all interested readers and investors in Toshiba Machine to have a good long read of the <a href="https://disclosure.edinet-fsa.go.jp/E01EW/BLMainController.jsp?uji.verb=W00Z1020initialize&amp;uji.bean=ek.bean.EKW00Z1020Bean&amp;TID=W00Z1020&amp;PID=W1E63041&amp;SESSIONKEY=1579583506955&amp;lgKbn=2&amp;dflg=0&amp;iflg=&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=S100HRXX" target="_blank" rel="noopener">Tender Offer Document</a> released by the Bidder.</div>More below, including pro-ration estimates and Arb Grids - both Regular Type and Funky Type.

Neither "Murakami Fund" group company Office Support KK nor any other Murakami-affiliated company seems to have announced a Tender Offer for Toshiba Machine (6104 JP) on the 20th as promised. Instead, we jump right to the Tender Offer launch, as disclosed (Japanese only link) on EDINET this morning, by City Index Elevens KK which is 100% owned by two Murakami group companies.The Tender Offer is for a minimum of 3.5mm shares and a maximum of 7.5mm shares, and if successful at the top end, it will mean Murakami-affiliated companies will own a total of 43.82% of voting rights and 35.28% of shares outstanding (because they own a combined 3.076mm shares as of the launch of the Tender).This Tender Offer price is lower, and for a lower number of shares than I thought. The Tender Offer price of ¥3,456 is symbolic. The document says it is "about one time net assets." It is, in fact, exactly 1.00x book value as of 30 September, which was when Nuflare Technology (6256 JP) was trading at a lower price (the Tender Offer was 55% higher than the end-Sep mark price on their balance sheet). By my calculations, ¥3,456/share is about 0.92-0.95x run-rate book value.This is a deliberately low hurdle set by Murakami-san, and he explicitly says so in the document. It is a gift to Toshiba Machine. He effectively suggests what the right answer is for Toshiba Machine to double ROE. And he invites Toshiba Machine to work hand-in-hand with him to get it done.I URGE all interested readers and investors in Toshiba Machine to have a good long read of the Tender Offer Document released by the Bidder.More below, including pro-ration estimates and Arb Grids - both Regular Type and Funky Type.

Murakami Hands Toshiba Machine A Gimme - A TOB Designed To Fail and for Machine To Show Its Value

On 21 January 2019, my favorite manufacturer of garbage trucks, vertical carousel parking infrastructure, sea planes, and jetways - <a href="https://www.smartkarma.com/entities/18738" target="_blank" data-smartkarma-citation="entities:18738:1">Shinmaywa Industries (7224 JP)</a> - announced a share buyback. This was not unusual. The company bought back shares last year and indicated earlier this year it would seek a relatively high return of capital to shareholders.  In the last five months of 2018, the company bought back 3.6% of shares outstanding, and cancelled those shares at the end of December 2018). Indeed, the company on January 9th this year announced a revised dividend forecast for the year ending March 2019. The dividend was lifted by 1 yen. The company also announced a new policy of shareholder returns for the year starting April 1. <blockquote>While taking into consideration strategic business investment for the future and the internal reserves required for maintaining and expanding the Company’s management foundation, we are aware that appropriate return of profit to shareholders is an important management issue. In that regard, in our Medium-term Management Plan for the three years to the end of the fiscal year ending March 31, 2021, “Change for Growing, 2020,” (the “Medium-term Management Plan”), which was announced in May 2018, we set up a basic payout ratio on a consolidated basis of 40-50% and carrying out flexible acquisition of treasury shares with a focus on improvement of capital efficiency as basic shareholder return policies.</blockquote>The company acknowledged the above and announced it would seek to add a commemorative (70th anniversary of incorporation and 100th anniversary of being in business) special dividend of ¥45/share, on top of the normal interim dividend (which is likely to be ¥18-19/share) paid to shareholders as of the end of September 2019.That was nice, but that was little preparation for the news of 21 January.<ul>
<li>On that day, the company announced yet another increase in dividend forecast for the current fiscal year, raising the H2 dividend - which had just been raised from ¥18/share to ¥19/share less than two weeks ago - to ¥27/share.</li>
<li>The company also announced a Tender Offer to buy back 26.666mm its own shares at a roughly 10.5% premium to last trade.  </li>
</ul>That's a big tender offer. It is ¥40bn and 29.0% of shares outstanding. Regular readers of Smartkarma will know that I will have comments on situations like these.

On 21 January 2019, my favorite manufacturer of garbage trucks, vertical carousel parking infrastructure, sea planes, and jetways - Shinmaywa Industries (7224 JP) - announced a share buyback. This was not unusual. The company bought back shares last year and indicated earlier this year it would seek a relatively high return of capital to shareholders.  In the last five months of 2018, the company bought back 3.6% of shares outstanding, and cancelled those shares at the end of December 2018). Indeed, the company on January 9th this year announced a revised dividend forecast for the year ending March 2019. The dividend was lifted by 1 yen. The company also announced a new policy of shareholder returns for the year starting April 1. While taking into consideration strategic business investment for the future and the internal reserves required for maintaining and expanding the Company’s management foundation, we are aware that appropriate return of profit to shareholders is an important management issue. In that regard, in our Medium-term Management Plan for the three years to the end of the fiscal year ending March 31, 2021, “Change for Growing, 2020,” (the “Medium-term Management Plan”), which was announced in May 2018, we set up a basic payout ratio on a consolidated basis of 40-50% and carrying out flexible acquisition of treasury shares with a focus on improvement of capital efficiency as basic shareholder return policies.The company acknowledged the above and announced it would seek to add a commemorative (70th anniversary of incorporation and 100th anniversary of being in business) special dividend of ¥45/share, on top of the normal interim dividend (which is likely to be ¥18-19/share) paid to shareholders as of the end of September 2019.That was nice, but that was little preparation for the news of 21 January.
On that day, the company announced yet another increase in dividend forecast for the current fiscal year, raising the H2 dividend - which had just been raised from ¥18/share to ¥19/share less than two weeks ago - to ¥27/share.
The company also announced a Tender Offer to buy back 26.666mm its own shares at a roughly 10.5% premium to last trade.  
That's a big tender offer. It is ¥40bn and 29.0% of shares outstanding. Regular readers of Smartkarma will know that I will have comments on situations like these. 

Shinmaywa Own Share Tender Offer at Premium

Director, Pearl Hill Advisors

Nicholas Tanner

Director

Pearl Hill Advisors

Equity Bottom-Up

This makes special duty vehicles (44% of sales), aircraft parts (20%), industrial machinery (15%) and parking systems (15%). To 3/02 operating profit was Y2bn. Since then it has steadily recovered to Y15.3bn to 3/16 but is now starting to slip. Last year it fell to Y13.1bn and this year Y11bn is forecast.We believe at best operating profits will be flat next year. The issue is falling profitability in the aircraft business at a time when demand for specialty vehicles, strong for a few years now…

This makes special duty vehicles (44% of sales), aircraft parts (20%), industrial machinery (15%) and parking systems (15%). To 3/02 operating profit was Y2bn. Since then it has steadily recovered to Y15.3bn to 3/16 but is now starting to slip. Last year it fell to Y13.1bn and this year Y11bn is forecast.We believe at best operating profits will be flat next year. The issue is falling profitability in the aircraft business at a time when demand for specialty vehicles, strong for a few years now…

Shinmaywa (7224) Very Cheap but Profits Drifting

Japan

ShinMaywa Industries, Ltd. manufactures special duty vehicles such as dump trucks and cranes.  The Company also produces aircraft parts, industrial machinery, sky-parking systems, and environmental systems such as underwater kitchen refuse decomposers.

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Shinmaywa Industries (7224 JP)

🇯🇵 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

Murakami Hands Toshiba Machine A Gimme - A TOB Designed To Fail and for Machine To Show Its Value

Neither "Murakami Fund" group company Office Support KK nor any other Murakami-affiliated company seems to have announced a Tender Offer for...

Travis Lundy

Shinmaywa (7224) Very Cheap but Profits Drifting

This makes special duty vehicles (44% of sales), aircraft parts (20%), industrial machinery (15%) and parking systems (15%). To 3/02 operating...

Pearl Hill Advisors

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

🇯🇵 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

Murakami Hands Toshiba Machine A Gimme - A TOB Designed To Fail and for Machine To Show Its Value

Neither "Murakami Fund" group company Office Support KK nor any other Murakami-affiliated company seems to have announced a Tender Offer for...

Travis Lundy

Shinmaywa Own Share Tender Offer at Premium

On 21 January 2019, my favorite manufacturer of garbage trucks, vertical carousel parking infrastructure, sea planes, and jetways - Shinmaywa...

Travis Lundy

Shinmaywa (7224) Very Cheap but Profits Drifting

This makes special duty vehicles (44% of sales), aircraft parts (20%), industrial machinery (15%) and parking systems (15%). To 3/02 operating...

Pearl Hill Advisors