Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p><a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener"><strong>Hitachi Ltd (6501 JP)</strong></a> has, for over a decade, been restructuring itself - selling subsidiaries here and buying them in there. There are two remaining after the recent sale of <strong><a href="https://www.smartkarma.com/entities/hitachi-chemical-co-ltd" target="_blank" data-smartkarma-citation="entities:14457:1" rel="noopener">Hitachi Chemical (4217 JP)</a></strong>, de-consolidation of <strong><a href="https://www.smartkarma.com/entities/hitachi-capital-corp" target="_blank" data-smartkarma-citation="entities:14410:1" rel="noopener">Hitachi Capital (8586 JP)</a></strong>, and buy-in of <strong><a href="https://www.smartkarma.com/entities/hitachi-high-tech-corporation" target="_blank" data-smartkarma-citation="entities:7046:1" rel="noopener">Hitachi High-Tech (8036 JP)</a></strong>. </p><p>The earnings call in May occasioned another presentation - that of the <span>update on </span><a href="http://www.hitachi.com/New/cnews/month/2020/05/200529a.html" target="_blank" rel="noopener">Progress of the Mid-Term Management Plan</a><span> (with a webcast and a </span><a href="http://www.hitachi.com/New/cnews/month/2020/05/200529a/f_200529apre.pdf" target="_blank" rel="noopener">presentation deck</a><span>), where the CEO responded to a question thusly:</span></p><div><blockquote>
<p><strong>QUESTION: </strong> Next question is regarding the, against the backdrop of COVID-19, is this going to have an impact on the reorganisation of the listed subsidiaries?</p>
<p><strong>ANSWER BY CEO HIGASHIHARA:  </strong>Regarding the listed subsidiary answer. <strong>Hitachi Construction Machinery</strong> and <strong>Hitachi Metals</strong> remain. And what we are telling the top management is that, in the time frame of fiscal year 2021 to 2024, we have to make sure these companies are able to compete globally. They are now evaluating this. It is not just a matter of COVID-19. Mid- to long-term growth strategy will be emphasised so the reorganisation strategy for the listed subsidiaries will not be impacted by COVID-19.</p>
</blockquote></div><div>
<p>FY 2021 to FY 2024 is a three year window starting next April, with FY2021 ending in March 2022 and FY2024 ending in March 2025.</p>
<div>
<p>That was May 29, less than five months ago and the situation was discussed in <a href="https://www.smartkarma.com/insights/hitachi-s-capital-case-liquidating-land-policy-holdings-what-about-the-subs" target="_blank" data-smartkarma-citation="insights:39920" rel="noopener">Hitachi's Capital Case - Liquidating Land &amp; Policy Holdings? What About the Subs?</a>.</p>
<p>Friday saw an article out of the Nikkei suggesting <strong>Hitachi</strong> might sell half its stake in <strong><a href="https://www.smartkarma.com/entities/hitachi-construction-machinery" target="_blank" data-smartkarma-citation="entities:19433:1" rel="noopener">Hitachi Construction Machinery (6305 JP)</a></strong> ("HCM") to a third party, at a discount, and that it might start a sale process on <a href="https://www.smartkarma.com/entities/hitachi-metals-ltd" target="_blank" data-smartkarma-citation="entities:8561:1" rel="noopener"><strong>Hitachi Metals (5486 JP</strong>)</a> "this month."</p>
</div>
<div>
<p>It strikes me as unlikely <strong>Hitachi</strong> would <em>themselves</em> be throwing in the towel 5 months later before the start of the time frame in which top management of the two subsidiaries are supposed to be able to compete globally. All of this is likely getting done with the will and direction of the subsidiaries themselves. This strikes me as some kind of agreement with management of <strong>HCM</strong> that they would not be averse to receiving expert help from outside while remaining listed. </p>
<p>This changes things.</p>
<p><strong>Hitachi</strong> becomes a different animal. It becomes a <em>non-stub trade</em> (parent vs significant value of listed short-able subs) for the first time in a very long time. And the optics change quite a bit.</p>
</div>
</div>

Hitachi Ltd (6501 JP) has, for over a decade, been restructuring itself - selling subsidiaries here and buying them in there. There are two remaining after the recent sale of Hitachi Chemical (4217 JP), de-consolidation of Hitachi Capital (8586 JP), and buy-in of Hitachi High-Tech (8036 JP). The earnings call in May occasioned another presentation - that of the update on Progress of the Mid-Term Management Plan (with a webcast and a presentation deck), where the CEO responded to a question thusly:
QUESTION:  Next question is regarding the, against the backdrop of COVID-19, is this going to have an impact on the reorganisation of the listed subsidiaries?
ANSWER BY CEO HIGASHIHARA:  Regarding the listed subsidiary answer. Hitachi Construction Machinery and Hitachi Metals remain. And what we are telling the top management is that, in the time frame of fiscal year 2021 to 2024, we have to make sure these companies are able to compete globally. They are now evaluating this. It is not just a matter of COVID-19. Mid- to long-term growth strategy will be emphasised so the reorganisation strategy for the listed subsidiaries will not be impacted by COVID-19.

FY 2021 to FY 2024 is a three year window starting next April, with FY2021 ending in March 2022 and FY2024 ending in March 2025.

That was May 29, less than five months ago and the situation was discussed in Hitachi's Capital Case - Liquidating Land &amp; Policy Holdings? What About the Subs?.
Friday saw an article out of the Nikkei suggesting Hitachi might sell half its stake in Hitachi Construction Machinery (6305 JP) ("HCM") to a third party, at a discount, and that it might start a sale process on Hitachi Metals (5486 JP) "this month."


It strikes me as unlikely Hitachi would themselves be throwing in the towel 5 months later before the start of the time frame in which top management of the two subsidiaries are supposed to be able to compete globally. All of this is likely getting done with the will and direction of the subsidiaries themselves. This strikes me as some kind of agreement with management of HCM that they would not be averse to receiving expert help from outside while remaining listed. 
This changes things.
Hitachi becomes a different animal. It becomes a non-stub trade (parent vs significant value of listed short-able subs) for the first time in a very long time. And the optics change quite a bit.



President

Thomas Coughlin

Coughlin Associates

Equity Bottom-Up

Seagate Technology Holdings PL / Equity Bottom-Up

<p style="text-align: start;">Seagate is seeing a tapering off of the nearline HDD buy to support cloud services during the Covid-19 pandemic.  However, sales of these HDDs and mass storage HDDs for video and related big data applications will be continued drivers for sales into calendar 2021.  The company said that 63% of their HDD revenue in C3Q 2020 was from mass capacity HDDs, including nearline HDDs.  The company also expects some consumer rebound for HDDs in 2021.  In the long run, the conversion to majority mass capacity HDDs will raise ASPs and by 2024-2025 start to increase total HDD unit shipments, further driving revenue and profitability.</p>

Seagate is seeing a tapering off of the nearline HDD buy to support cloud services during the Covid-19 pandemic.  However, sales of these HDDs and mass storage HDDs for video and related big data applications will be continued drivers for sales into calendar 2021.  The company said that 63% of their HDD revenue in C3Q 2020 was from mass capacity HDDs, including nearline HDDs.  The company also expects some consumer rebound for HDDs in 2021.  In the long run, the conversion to majority mass capacity HDDs will raise ASPs and by 2024-2025 start to increase total HDD unit shipments, further driving revenue and profitability.

Seagate:  Long Term Opportunities with Mass Storage HDDs

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/689/original/2020-08-20_08-32-43.png?1597879991" class="editor-image img-responsive" data-smartkarma-image-id="153689"></figure><div class="content-caption">All charts sourced from Japan Analytics.</div><p><strong>BRUTAL</strong> - The summer earnings 'season' reflected the broadening impact of COVID-19 on the Japanese and world economies, however, in terms of profit decline, the pace is more moderate than in the previous quarter. Japanese corporates are starting to engage in aggressive cost controls. As a result, an with no signs of virus abating or a vaccine being readily available, earnings will continue to decline in the current quarter. We have yet to reach a low point in this earnings cycle. Many companies delayed making initial forecasts for the current year. As that deficiency is gradually remedied, earnings forecasts are leading trailing results to the downside. The 'gap' for operating profits is ¥5.7 trillion, or 13%. A similar percentage fall applies to net income. Operating income is forecast to be 41% below the peak level of 2019; for net income, the decline is 57%. The aggregate forecast operating margin of 4.8%% is 294 bps lower than the peak, while the forecast net margin is 318 bps lower at 2.67%. If achieved, this outcome will exceed that of the 2008/9 financial crisis when the aggregate was negative. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/694/original/2020-08-20_09-02-34.png?1597881766" class="editor-image img-responsive" data-smartkarma-image-id="153694"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/695/original/2020-08-20_09-03-07.png?1597881801" class="editor-image img-responsive" data-smartkarma-image-id="153695"></figure><p><strong>TTM RESULTS &amp; FORECASTS</strong> - Using trailing-twelve-month data to smooth out the seasonality in earnings, TTM operating income is 29% lower year-on-year on a 6% decline in sales. Running the same comparison using published forecasts, operating profit expectations are 40% lower than a year ago and revenues 10% lower.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/727/original/2020-08-20_10-57-21.png?1597888653" class="editor-image img-responsive" data-smartkarma-image-id="153727"></figure><p><strong>DAMN THE TORPEDOES</strong> - Our scoring methodology tracks all quarterly results since 2003 and every annual and interim forecast made since 2013. The lines above represent the cap-weighted aggregates of those scores overlayed with the daily series for TOPIX. Other than the three years before the advent of 'Abenomics' and the last six months, the directional correlation is clear.  Mr Market, supported by the BoJ and Federal Reserve, is 'banking' on a sharp and sustained recovery over the next two quarters. </p><div class="content-highlight"><p>In the<strong> DETAIL</strong> section below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. We shall also review our Results and Revision Scoring for the market, Sectors and Companies.</p></div>

All charts sourced from Japan Analytics.BRUTAL - The summer earnings 'season' reflected the broadening impact of COVID-19 on the Japanese and world economies, however, in terms of profit decline, the pace is more moderate than in the previous quarter. Japanese corporates are starting to engage in aggressive cost controls. As a result, an with no signs of virus abating or a vaccine being readily available, earnings will continue to decline in the current quarter. We have yet to reach a low point in this earnings cycle. Many companies delayed making initial forecasts for the current year. As that deficiency is gradually remedied, earnings forecasts are leading trailing results to the downside. The 'gap' for operating profits is ¥5.7 trillion, or 13%. A similar percentage fall applies to net income. Operating income is forecast to be 41% below the peak level of 2019; for net income, the decline is 57%. The aggregate forecast operating margin of 4.8%% is 294 bps lower than the peak, while the forecast net margin is 318 bps lower at 2.67%. If achieved, this outcome will exceed that of the 2008/9 financial crisis when the aggregate was negative. TTM RESULTS &amp; FORECASTS - Using trailing-twelve-month data to smooth out the seasonality in earnings, TTM operating income is 29% lower year-on-year on a 6% decline in sales. Running the same comparison using published forecasts, operating profit expectations are 40% lower than a year ago and revenues 10% lower.DAMN THE TORPEDOES - Our scoring methodology tracks all quarterly results since 2003 and every annual and interim forecast made since 2013. The lines above represent the cap-weighted aggregates of those scores overlayed with the daily series for TOPIX. Other than the three years before the advent of 'Abenomics' and the last six months, the directional correlation is clear.  Mr Market, supported by the BoJ and Federal Reserve, is 'banking' on a sharp and sustained recovery over the next two quarters. In the DETAIL section below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. We shall also review our Results and Revision Scoring for the market, Sectors and Companies.

🇯🇵 JAPAN • IT’S A WRAP - Summer 2020 Results & Revisions Review

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div><p>The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.</p></div><div><p>Hong Kong saw shorts rise on <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:26:1">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/sun-hung-kai-properties-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:111:1">Sun Hung Kai Properties (16 HK)</a> and <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" rel="noopener" data-smartkarma-citation="entities:45:1">China Construction Bank H (939 HK)</a> while there was big short covering on <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" rel="noopener" data-smartkarma-citation="entities:28434:1">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/semiconductor-manufacturing" target="_blank" rel="noopener" data-smartkarma-citation="entities:14231:1">Semiconductor Manufacturing (981 HK)</a> and <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:24409:1">Xiaomi Corp (1810 HK)</a>. Shorts jumped on Financials, Communication Services and Real Estate and covered position in Information Technology, Consumer Discretionary and Consumer Staples.</p></div><div><p>Japan saw an increase in shorts on <a href="https://www.smartkarma.com/entities/shiseido-company-limited" target="_blank" rel="noopener" data-smartkarma-citation="entities:5718:1">Shiseido Company (4911 JP)</a>, <a href="https://www.smartkarma.com/entities/kubota-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:12926:1">Kubota Corp (6326 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-real-estate-investment" target="_blank" rel="noopener" data-smartkarma-citation="entities:16867:1">Japan Real Estate Investment (8952 JP)</a> and a reduction is shorts on <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" rel="noopener" data-smartkarma-citation="entities:27445:1">Softbank Corp (9434 JP)</a> and <a href="https://www.smartkarma.com/entities/showa-denko-k-k" target="_blank" rel="noopener" data-smartkarma-citation="entities:1496:1">Showa Denko K.K. (4004 JP)</a>. Sectorally, shorts increased in Real Estate, Industrials and Consumer Staples and shorts were covered in Communication Services.</p></div><div><p>Shorts in Korea increased led by Technology Hardware and Consumer Durables.</p></div><div><p>Shorts rose in Taiwan led by Semiconductors, Technology Hardware, and Materials while shorts covered small size in Capital Goods and Banks.</p></div>

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.Hong Kong saw shorts rise on Tencent Holdings (700 HK), Sun Hung Kai Properties (16 HK) and China Construction Bank H (939 HK) while there was big short covering on Alibaba Group (9988 HK), Semiconductor Manufacturing (981 HK) and Xiaomi Corp (1810 HK). Shorts jumped on Financials, Communication Services and Real Estate and covered position in Information Technology, Consumer Discretionary and Consumer Staples.Japan saw an increase in shorts on Shiseido Company (4911 JP), Kubota Corp (6326 JP), Japan Real Estate Investment (8952 JP) and a reduction is shorts on Softbank Corp (9434 JP) and Showa Denko K.K. (4004 JP). Sectorally, shorts increased in Real Estate, Industrials and Consumer Staples and shorts were covered in Communication Services.Shorts in Korea increased led by Technology Hardware and Consumer Durables.Shorts rose in Taiwan led by Semiconductors, Technology Hardware, and Materials while shorts covered small size in Capital Goods and Banks.

Asia Short Interest Weekly - HK Financials and Property, Japan Real Estate, Korea Tech, Taiwan Semis

Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

<p>What a surprise. Lotte Chemical, once pursuing Hitachi Chemical, is now owning a 4.46% stake in Showa Denko, which beat Lotte in the Hitachi Chemical race.</p><hr><p><em>Below is Lotte Chemical's regulatory filing for the 1Q quarterly report. Here, it says that it owns a 4.46% stake.</em></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/135/049/original/1.png?1590116665" class="editor-image img-responsive" data-smartkarma-image-id="135049"></figure><div class="content-caption">(Source: <a href="http://dart.fss.or.kr/dsaf001/main.do?rcpNo=20200515001484" target="_blank" rel="noopener">DART</a>)</div><hr><h2>How exactly did Lotte do it?</h2><p>Lotte disclosed in the same regulatory filing that it had begun to buy Showa Denko shares on March 13. In March, it had amassed a total of 3.8M shares (2.54%) for ₩88.4bil. Then in April, it had bought other 2.87M shares (1.92%) for ₩73.3bil, bringing up the total to 6.67M shares (4.46%).</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/135/051/original/2.png?1590116991" class="editor-image img-responsive" data-smartkarma-image-id="135051"></figure><h2>Block deals or bought directly in the market?</h2><p>There have been no official words on how Lotte had obtained these shares. But the local street speculates that Lotte had purchased the shares in the market. Below is the latest news report that quotes one industry source saying that Lotte had acquired the shares directly in the market in small quantities from March to April this year.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/135/056/original/4.png?1590117494" class="editor-image img-responsive" data-smartkarma-image-id="135056"></figure><div class="content-caption">(Source: <a href="https://view.asiae.co.kr/article/2020052209375771677" target="_blank" rel="noopener">The Asia Business Daily</a> - May 22, 2020)</div>

What a surprise. Lotte Chemical, once pursuing Hitachi Chemical, is now owning a 4.46% stake in Showa Denko, which beat Lotte in the Hitachi Chemical race.Below is Lotte Chemical's regulatory filing for the 1Q quarterly report. Here, it says that it owns a 4.46% stake.(Source: DART)How exactly did Lotte do it?Lotte disclosed in the same regulatory filing that it had begun to buy Showa Denko shares on March 13. In March, it had amassed a total of 3.8M shares (2.54%) for ₩88.4bil. Then in April, it had bought other 2.87M shares (1.92%) for ₩73.3bil, bringing up the total to 6.67M shares (4.46%).Block deals or bought directly in the market?There have been no official words on how Lotte had obtained these shares. But the local street speculates that Lotte had purchased the shares in the market. Below is the latest news report that quotes one industry source saying that Lotte had acquired the shares directly in the market in small quantities from March to April this year.(Source: The Asia Business Daily - May 22, 2020)

Lotte Chemical Is Buying Showa Denko Shares in Market: Now Holds 4.46%

Japan

Resonac Holdings Corporation manufactures and distributes chemical products. The Company produces synthetic resins, petrochemical products, inorganics, and other related products. Resonac Holdings also produces ceramics, metals, carbon, electronic materials, and other products.

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Resonac Holdings (4004 JP)

The Right Trade May Be Hitachi

Hitachi is getting to the end of its Core vs Non-Core restructuring campaign. Two remaining subs have newsflow, and earnings announcements shortly....

Travis Lundy

Seagate: Long Term Opportunities with Mass Storage HDDs

Seagate Technology quarterly results show 63% of revenue from Mass Capacity HDDs and long term mass capacity HDD growth, demonstrating medium and...

Thomas Coughlin

🇯🇵 JAPAN • IT’S A WRAP - Summer 2020 Results & Revisions Review

BRUTAL - The summer earnings 'season' reflected the broadening impact of COVID-19 on the Japanese and world economies, however, in terms of profit...

Campbell Gunn

Asia Short Interest Weekly - HK Financials and Property, Japan Real Estate, Korea Tech, Taiwan Semis

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong...

Brian Freitas

Lotte Chemical Is Buying Showa Denko Shares in Market: Now Holds 4.46%

What a surprise. Lotte Chemical, once pursuing Hitachi Chemical, is now owning a 4.46% stake in Showa Denko, which beat Lotte in the Hitachi...

Sanghyun Park

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