Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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.

Event-Driven

<p>In our previous note on Leyou we noted that the company was in a good position strategically despite our scepticism about the longevity of its key profit driver, Digital Extreme’s Warframe. That has not changed greatly and Sony’s reported interest in the company is highly credible in our opinion. Against the backdrop of Microsoft’s reported interest in acquiring Warner Brothers Interactive Entertainment, we feel the move would make sense as both players move to strengthen 1<sup>st</sup> party development capabilities.</p>

In our previous note on Leyou we noted that the company was in a good position strategically despite our scepticism about the longevity of its key profit driver, Digital Extreme’s Warframe. That has not changed greatly and Sony’s reported interest in the company is highly credible in our opinion. Against the backdrop of Microsoft’s reported interest in acquiring Warner Brothers Interactive Entertainment, we feel the move would make sense as both players move to strengthen 1st party development capabilities.

Leyou – Is Sony Targeting Splash Damage as Microsoft Targets Warner Brothers Interactive

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Last Week In Event SPACE: Keisei/Oriental Ld, Nat'l Storage, Sembcorp, Leyou, Accordia Golf, Samba

<div>
<h2>A Brief Background</h2>
<p>On the 20 September 2019, <a href="https://www.smartkarma.com/entities/leyou-technologies-holdings" target="_blank" data-smartkarma-citation="entities:5831:1" rel="noopener">Leyou Technologies (1089 HK)</a>, an online game operator in China, <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0525/2020052501310.pdf" target="_blank" rel="noopener">announced</a> it was in preliminary discussions with various independent potential investors in connection with either a possible share disposal from its major shareholder (Yuk Kwok Cheung Charles) holding 52.37% (at the time) or a possible acquisition of a substantial part of the business. The potential buyer, rumoured at the time to be <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>-backed <a href="https://www.smartkarma.com/entities/idreamsky-technology-holdings" target="_blank" data-smartkarma-citation="entities:5570:1" rel="noopener">iDreamsky Technology Limited (1119 HK)</a>, was confirmed on the <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2019/1209/2019120900746.pdf" target="_blank" rel="noopener">9 December</a>.</p>
<p>On the 5 May, Leyou <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0504/2020050403489.pdf" target="_blank" rel="noopener">announced</a> Yuk and <a href="https://www.smartkarma.com/entities/zhejiang-century-huatong-a" target="_blank" data-smartkarma-citation="entities:4771:1" rel="noopener">Zhejiang Century Huatong (002602 CH)</a> had entered into an MOU for Yuk’s 69.2% stake in Leyou. It was the intention of Yuk and Centaury Huatong to enter into a formal agreement within 90 days from the announcement of the MOU. No price was mentioned in the announcement. </p>
</div>
<div>
<p>Separately, on the 3 April, online consumer finance service provider <a href="https://www.smartkarma.com/entities/vcredit-holdings-ltd" target="_blank" data-smartkarma-citation="entities:27143:1" rel="noopener">VCredit Holdings Ltd (2003 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0405/2020040500015.pdf" target="_blank" rel="noopener">announced</a> the subscription and issuance of 600mn new shares at $6.60/share (HK$3.96bn all-in, to be paid via a deposit and two installments), equivalent to 54.58% of shares out on FD basis. The subscriber was Leyou's Yuk. With the subscription outlay accounting for ~80% of Luk's holding in Leyou, on the surface, this appeared a total investment switch.  But that prospect fell apart after VCredit <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0525/2020052501310.pdf" target="_blank" rel="noopener">announced</a> on the 25 May the subscription agreement was now terminated</p>
</div>
<h2>The New News</h2>
<div>
<p>Late this afternoon, Bloomberg reported that <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony Corp (6758 JP)</a> was "<em>weighing a bid</em>" for Leyou.</p>
<p>Leyou shares closed up 9.8% to $2.80, its highest close since September 2018, but below the indicative (but still not formally announced) Offer price of $3.11/share under iDreamsky's proposal. Century Huatong tentative Offer price has similarly not been made public, but is believed to be higher than iDreamsky's. </p>
</div>
<div>
<p>As always, more below the fold.</p>
</div>


A Brief Background
On the 20 September 2019, Leyou Technologies (1089 HK), an online game operator in China, announced it was in preliminary discussions with various independent potential investors in connection with either a possible share disposal from its major shareholder (Yuk Kwok Cheung Charles) holding 52.37% (at the time) or a possible acquisition of a substantial part of the business. The potential buyer, rumoured at the time to be Tencent Holdings (700 HK)-backed iDreamsky Technology Limited (1119 HK), was confirmed on the 9 December.
On the 5 May, Leyou announced Yuk and Zhejiang Century Huatong (002602 CH) had entered into an MOU for Yuk’s 69.2% stake in Leyou. It was the intention of Yuk and Centaury Huatong to enter into a formal agreement within 90 days from the announcement of the MOU. No price was mentioned in the announcement. 


Separately, on the 3 April, online consumer finance service provider VCredit Holdings Ltd (2003 HK) announced the subscription and issuance of 600mn new shares at $6.60/share (HK$3.96bn all-in, to be paid via a deposit and two installments), equivalent to 54.58% of shares out on FD basis. The subscriber was Leyou's Yuk. With the subscription outlay accounting for ~80% of Luk's holding in Leyou, on the surface, this appeared a total investment switch.  But that prospect fell apart after VCredit announced on the 25 May the subscription agreement was now terminated

The New News

Late this afternoon, Bloomberg reported that Sony Corp (6758 JP) was "weighing a bid" for Leyou.
Leyou shares closed up 9.8% to $2.80, its highest close since September 2018, but below the indicative (but still not formally announced) Offer price of $3.11/share under iDreamsky's proposal. Century Huatong tentative Offer price has similarly not been made public, but is believed to be higher than iDreamsky's. 


As always, more below the fold.


'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<p><strong>FROM OPERATING TO FINANCING CASH FLOWS</strong> -  Having examined Operating Cash Flow in our previous <a href="https://www.smartkarma.com/insights/japan-stress-tests-part-2-operating-cash-flow-accruals" target="_blank" data-smartkarma-citation="insights:40321" rel="noopener">Insight</a>, we shall look into the 'stressors' between Operating Cash Flow and Financing Cash Flow. In our reformulated Cash Flow Statements, cash flows relating to operating activities are divided into Operating Cash Flows and Investing Cash Flows, which comprise Fixed Asset and Inventory Cash Flows.  Free Cash Flow is the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow. Inventories are not included in Operating Cash Flow as they are considered discretionary, are often related to Fixed asset Cash Flows, and can be highly seasonal.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/225/original/2020-06-21_08-34-07.png?1592698079" class="editor-image img-responsive" data-smartkarma-image-id="141225"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>JAPAN WAS FCF POSITIVE IN Q4..</strong> - Despite the decline in Operating Cash Flow in the last quarter (the final quarter of the Fiscal Year for most Japanese companies), Investing Cash Flow was more positive than in any quarter since FY2016-Q4, which also coincided with the last business cycle low. As a result, the aggregate Free Cash Flow for the 3,639 listed non-financial companies (excluding<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>) was an impressive ¥8.4 trillion or an annualised yield of 6.4%.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/223/original/2020-06-21_08-51-12.png?1592697088" class="editor-image img-responsive" data-smartkarma-image-id="141223"></figure><div class="content-caption">Source: Japan Analytics</div><p><strong>..AS CAPEX WAS PUT ON HOLD</strong> - Seasonally Japanese companies capital expenditures are higher in the second half of the fiscal year- in FY2019, ¥21trillion was added to Operating Assets. In contrast, FY2020 saw a 79% decline in capex to ¥4.4 trillion, all of which was spent in the third quarter. This decline is the most substantial second-half quarter-on-quarter contraction in fixed asset outflows since 2009.   </p><p>In the <strong>DETAIL</strong> below, we shall highlight those 'outlier' large-cap companies which are either end of the capex, inventory and Free Cash Flow tables, and focus on those with the greatest intimations of business 'stress'. We have excluded the Real Estate Sector from this analysis due to the inherent volatility of fixed assets and inventory cash flows fo these companies.</p>

FROM OPERATING TO FINANCING CASH FLOWS -  Having examined Operating Cash Flow in our previous Insight, we shall look into the 'stressors' between Operating Cash Flow and Financing Cash Flow. In our reformulated Cash Flow Statements, cash flows relating to operating activities are divided into Operating Cash Flows and Investing Cash Flows, which comprise Fixed Asset and Inventory Cash Flows.  Free Cash Flow is the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow. Inventories are not included in Operating Cash Flow as they are considered discretionary, are often related to Fixed asset Cash Flows, and can be highly seasonal.Source: Japan AnalyticsJAPAN WAS FCF POSITIVE IN Q4.. - Despite the decline in Operating Cash Flow in the last quarter (the final quarter of the Fiscal Year for most Japanese companies), Investing Cash Flow was more positive than in any quarter since FY2016-Q4, which also coincided with the last business cycle low. As a result, the aggregate Free Cash Flow for the 3,639 listed non-financial companies (excluding Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)) was an impressive ¥8.4 trillion or an annualised yield of 6.4%.Source: Japan Analytics..AS CAPEX WAS PUT ON HOLD - Seasonally Japanese companies capital expenditures are higher in the second half of the fiscal year- in FY2019, ¥21trillion was added to Operating Assets. In contrast, FY2020 saw a 79% decline in capex to ¥4.4 trillion, all of which was spent in the third quarter. This decline is the most substantial second-half quarter-on-quarter contraction in fixed asset outflows since 2009.   In the DETAIL below, we shall highlight those 'outlier' large-cap companies which are either end of the capex, inventory and Free Cash Flow tables, and focus on those with the greatest intimations of business 'stress'. We have excluded the Real Estate Sector from this analysis due to the inherent volatility of fixed assets and inventory cash flows fo these companies.

🇯🇵 JAPAN - Stress Tests Part 3 - Inventory, Fixed Asset & Free Cash Flows

<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/139/997/original/2020-06-15_11-08-56.png?1592186965" class="editor-image img-responsive" data-smartkarma-image-id="139997"></figure><div class="content-caption">Source: Japan Analytics</div>
<p><strong>STRESS TESTS</strong> - This Insight is the second in our<strong> Japan Stress Test</strong> series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. <strong><a href="https://www.smartkarma.com/insights/japan-stress-tests-part-1-altman-z-scores" target="_blank" data-smartkarma-citation="insights:40180" rel="noopener">Part 1</a></strong> looked at the time-worn <strong>Altman-Z Score</strong> for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the 'lifeblood' of all businesses - <strong>Operating Cash Flow</strong>.</p>
<p><strong>ACCRUAL ACCOUNTING</strong> - Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, "<em>Accrual accounting brings the future forward in time and anticipates future cash flows.</em>"  Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. <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)'s</a> Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company's Relative Price Score over the last thirty years. Further Insights in this series will continue to 'mine'  the Cash Flow statement by exploring <strong>Financing Cash Flows</strong> and the <strong>Working Capital Cycle</strong>.</p>
<p><strong>REFORMULATED CASH FLOW</strong><strong>STATEMENTS</strong> - Our <strong>Operating Cash Flow</strong> calculation is derived from each company's<strong> Balance Sheet</strong> and<strong> Income Statement</strong> for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into <strong>Operating Cash Flow</strong> and <strong>Investing Cash Flow</strong>, which includes Fixed Asset and Inventory Cash Flows.  Cash flows relating to financing activities are divided into <strong>Financing Cash Flow</strong> and<strong> Shareholder Cash Flow</strong>. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of <strong>Other Comprehensive Income</strong> which are added to or subtracted from Shareholders' Equity. </p>
</div><p><strong>UNIVERSE</strong> - The universe for this Insight comprises the <strong>614</strong> Japanese companies with a market capitalisation excluding Treasury Stock over <strong>¥100 million</strong> and for which we have at least two years of cash flow data.  Five non-financial companies, which have significant financial subsidiaries<strong> (</strong><strong><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>)</strong>, have been excluded from this analysis. </p>


Source: Japan Analytics
STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated among larger Japanese companies. Part 1 looked at the time-worn Altman-Z Score for both manufacturing and non-manufacturing companies. In Part 2 will we turn our attention to the cash flow statement starting with the 'lifeblood' of all businesses - Operating Cash Flow.
ACCRUAL ACCOUNTING - Despite the sacrosanctity in some quarters of discounted cash flow analysis, for valuation purposes, our preference is to use accrual accounting. As Professor Stephen Penman states, "Accrual accounting brings the future forward in time and anticipates future cash flows."  Nevertheless, cash flow accounting, and the level of accounting accruals, can provide early insights into periodic stress. Nissan Motor (7201 JP)'s Accruals (Operating Income less Operating Cash Flow) as a percentage of period-end market capitalisation correlate with the company's Relative Price Score over the last thirty years. Further Insights in this series will continue to 'mine'  the Cash Flow statement by exploring Financing Cash Flows and the Working Capital Cycle.
REFORMULATED CASH FLOWSTATEMENTS - Our Operating Cash Flow calculation is derived from each company's Balance Sheet and Income Statement for periods of up to twenty-eight years. Cash Flow items relating to operating activities are divided into Operating Cash Flow and Investing Cash Flow, which includes Fixed Asset and Inventory Cash Flows.  Cash flows relating to financing activities are divided into Financing Cash Flow and Shareholder Cash Flow. The reformulated Balance Sheets, Income and Cash Flow Statements follow a clean-surplus relationship. All three Statements are fully articulated to include items of Other Comprehensive Income which are added to or subtracted from Shareholders' Equity. 
UNIVERSE - The universe for this Insight comprises the 614 Japanese companies with a market capitalisation excluding Treasury Stock over ¥100 million and for which we have at least two years of cash flow data.  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 2 - Operating Cash Flow & Accruals

Japan

Sony Corporation manufactures audio, home video game consoles, communications, key device and information technology products for the consumer and professional markets.  The Company's other businesses include music, pictures, computer entertainment, and online businesses.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Sony Corp (6758 JP)

Leyou – Is Sony Targeting Splash Damage as Microsoft Targets Warner Brothers Interactive

In our previous note on Leyou we noted that the company was in a good position strategically despite our scepticism about the longevity of its key...

Mio Kato

Last Week In Event SPACE: Keisei/Oriental Ld, Nat'l Storage, Sembcorp, Leyou, Accordia Golf, Samba

Last Week in Event SPACE ... With Tokyo Disneyland opening this past Wednesday, Keisei Electric Railway Co (9009 JP) was coming up "expensive"....

David Blennerhassett

Sony In The Mix To Takeover Leyou?

A Brief Background On the 20 September 2019, Leyou Technologies (1089 HK), an online game operator in China, announced it was in preliminary...

David Blennerhassett

🇯🇵 JAPAN - Stress Tests Part 3 - Inventory, Fixed Asset & Free Cash Flows

FROM OPERATING TO FINANCING CASH FLOWS - Having examined Operating Cash Flow in our previous Insight, we shall look into the 'stressors' between...

Campbell Gunn

🇯🇵 JAPAN - Stress Tests Part 2 - Operating Cash Flow & Accruals

STRESS TESTS - This Insight is the second in our Japan Stress Test series in which we endeavour to assess where business risk is concentrated...

Campbell Gunn

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)