Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

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.

Equity Bottom-Up

<ul>
<li>Shin-Etsu reported its 1QFY03/2021 results on Tuesday (28th July 2020) after market which saw both revenue and OP decline on a YoY basis. All the segments reported YoY drop in revenue and OP.</li>
<li>Shin-Etsu’s largest business, PVC/Chlor-Alkali business saw decline in revenue for a fourth consecutive quarter due to poor market conditions. The company expects price increases alongside improving market conditions to support a recovery in the segment towards the end of the year.</li>
<li>The company’s share price has rallied significantly since mid-March 2020 as the market expects the semiconductor silicon demand to rebound in 2021 leading to supply constraints.</li>
<li>Given the uncertainty in the markets caused by Covid-19 and the recent rally in the company’s share price, we remain cautious about further increase in the company’s share price in the short-term.</li>
</ul>


Shin-Etsu reported its 1QFY03/2021 results on Tuesday (28th July 2020) after market which saw both revenue and OP decline on a YoY basis. All the segments reported YoY drop in revenue and OP.
Shin-Etsu’s largest business, PVC/Chlor-Alkali business saw decline in revenue for a fourth consecutive quarter due to poor market conditions. The company expects price increases alongside improving market conditions to support a recovery in the segment towards the end of the year.
The company’s share price has rallied significantly since mid-March 2020 as the market expects the semiconductor silicon demand to rebound in 2021 leading to supply constraints.
Given the uncertainty in the markets caused by Covid-19 and the recent rally in the company’s share price, we remain cautious about further increase in the company’s share price in the short-term.


Shin-Etsu: All Segments Seeing Declines; Earnings Rebound Could Take Longer

'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/000/143/496/original/2020-06-30_14-16-44.png?1593494217" class="editor-image img-responsive" data-smartkarma-image-id="143496"></figure>
<div class="content-caption">Source • Japan Analytics</div>
THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to generate cash and is also known as the Cash Conversion Cycle. In practice, Net Working Capital is scaled by the number of days of Revenue or Cost of Goods Sold that are 'tied' up in three components - Receivables, Inventory, and Payables.
Net Working Capital Days varies by industry and the lower the number, the better. Amounts over 210 days are excessive, and a sign of business stress.  Net Working Capital is defined as:-
<ul>
<li>
+ Receivables/Revenue - the average number of days required to collect on sales. Businesses usually extend a degree of credit to non-cash customers.  Receivables Days over 100 are excessive.</li>
<li>
+ Inventory/Cost of Goods Sold - the average number of days it takes to sell out of Inventory. Amounts vary widely by industry but days over 210 are excessive.</li>
<li>- Payables/Cost of Goods Sold -the average number of days the company takes to settle transactions with suppliers. By extending nominally interest-free credit, suppliers provide operating leverage to a business. A larger negative number is better, but days less than -100 are excessive.</li>
</ul>
The relationship between Receivables and Payables should also be considered particularly where the company is giving more generous credit terms to its customers than it receives from its suppliers. The Cash Conversion Cycle for the aggregate of all non-financial currently-listed Japanese companies has averaged 77 days over the last thirty years. However, over the previous twelve months., a fourteen-day rise in Inventory Days during the last four years has pushed Net Working Capital Days to 93.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/529/original/2020-06-30_15-09-41.png?1593497395" class="editor-image img-responsive" data-smartkarma-image-id="143529"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/530/original/2020-06-30_15-10-32.png?1593497471" class="editor-image img-responsive" data-smartkarma-image-id="143530"></figure>
<div class="content-caption">Source • Japan Analytics</div>
<div class="content-caption"></div>
NET WORKING CAPITAL DAYS AS A STRESS TEST - The correlation between Net Working Capital Days and relative performance varies by company and by Sectors. The examples above show how signals can be heeded -  <a href="https://www.smartkarma.com/entities/nikon-corp" target="_blank" data-smartkarma-citation="entities:7117:1" rel="noopener">Nikon (7731 JP)</a>, or ignored - <a href="https://www.smartkarma.com/entities/smc-corp" target="_blank" data-smartkarma-citation="entities:20866:1" rel="noopener">SMC (6273 JP)</a> since 2018. (For more on SMC working capital issues, please see my colleague <a href="https://www.smartkarma.com/profiles/scott-foster" target="_blank" data-smartkarma-citation="accounts:1134" rel="noopener">Scott Foster</a>'s Insight of last year - <a href="https://www.smartkarma.com/insights/smc-6273-jp-getting-in-line-with-reality" target="_blank" data-smartkarma-citation="insights:30081" rel="noopener">SMC (6273 JP): Getting in Line with Reality</a>).   
For this Insight, we have limited our review to larger capitalisation manufacturing companies. In the DETAIL section below, we shall cover the outliers at both ends of Receivables Days, Inventory Days, Payables Days, and finally Net Working Capital Days.


Source • Japan Analytics
THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to generate cash and is also known as the Cash Conversion Cycle. In practice, Net Working Capital is scaled by the number of days of Revenue or Cost of Goods Sold that are 'tied' up in three components - Receivables, Inventory, and Payables.
Net Working Capital Days varies by industry and the lower the number, the better. Amounts over 210 days are excessive, and a sign of business stress.  Net Working Capital is defined as:-


+ Receivables/Revenue - the average number of days required to collect on sales. Businesses usually extend a degree of credit to non-cash customers.  Receivables Days over 100 are excessive.

+ Inventory/Cost of Goods Sold - the average number of days it takes to sell out of Inventory. Amounts vary widely by industry but days over 210 are excessive.
- Payables/Cost of Goods Sold -the average number of days the company takes to settle transactions with suppliers. By extending nominally interest-free credit, suppliers provide operating leverage to a business. A larger negative number is better, but days less than -100 are excessive.

The relationship between Receivables and Payables should also be considered particularly where the company is giving more generous credit terms to its customers than it receives from its suppliers. The Cash Conversion Cycle for the aggregate of all non-financial currently-listed Japanese companies has averaged 77 days over the last thirty years. However, over the previous twelve months., a fourteen-day rise in Inventory Days during the last four years has pushed Net Working Capital Days to 93.


Source • Japan Analytics

NET WORKING CAPITAL DAYS AS A STRESS TEST - The correlation between Net Working Capital Days and relative performance varies by company and by Sectors. The examples above show how signals can be heeded -  Nikon (7731 JP), or ignored - SMC (6273 JP) since 2018. (For more on SMC working capital issues, please see my colleague Scott Foster's Insight of last year - SMC (6273 JP): Getting in Line with Reality).   
For this Insight, we have limited our review to larger capitalisation manufacturing companies. In the DETAIL section below, we shall cover the outliers at both ends of Receivables Days, Inventory Days, Payables Days, and finally Net Working Capital Days.

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

FROM OPERATING TO FINANCING CASH FLOWS -  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.<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>JAPAN 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<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%.<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>..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.

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

Semiconductor & Technology Specialist, Ingenuity

William Keating

Semiconductor & Technology Specialist

Ingenuity

Our focus is exclusively on in-depth research & consulting in the broader semiconductor industry. We focus on the key players, namely Intel, Micron, Qualcomm, Apple, Samsung, NVIDIA, AMD, TSMC & Global Foundries - as well as some of the lesser known, but nonetheless critical, companies such as ASML (for EUV), Mellanox, Cavium, Xilinx etc. We specialise in their products, roadmaps, process technologies, competitive advantages & threats etc. We also help our clients understand the implications of new and emerging technologies, e.g. 3D X-Point, 3D NAND, Carbon Nanotubes, Autonomous Driving, Graphene, Silicon Photonics, Wafer-Level Optics, Artificial Intelligence, FPGA, GPU, ASIC etc. 

Semiconductor Analysis & Research

With all of the major silicon wafer manufacturers now having reported Q1 earnings, it's clear that the impact of COVID-19 was relatively minor as far as revenues net profits were concerned. That situation looks set to continue in the current quarter, with mostly flat to modestly higher revenue forecasts. The sector isn't COVID-19 immune however. Most manufacturers reported meaningfully higher logistics and shipping charges as freight-carrying passenger flights all but vanished during March. Furthermore, GlobalWafers reported that two of their facilities were forced to close for a month. While the bullish forecasts for the current quarter are encouraging, many believe this to be the result of inventory building in the face of the pandemic. As for the second half outlook, we were left with no actual forecasts, rather a strong sense that it all depends on the extent to which COVID-19 is demonstrably under control or not by then.Separately,  there was an important milestone during the first quarter with China's <a href="http://nsig.com/en" target="_blank" rel="noopener">National Semiconductor Industry Group</a> (NSIG) launching its IPO on the Shenzhen STAR market.

With all of the major silicon wafer manufacturers now having reported Q1 earnings, it's clear that the impact of COVID-19 was relatively minor as far as revenues net profits were concerned. That situation looks set to continue in the current quarter, with mostly flat to modestly higher revenue forecasts. The sector isn't COVID-19 immune however. Most manufacturers reported meaningfully higher logistics and shipping charges as freight-carrying passenger flights all but vanished during March. Furthermore, GlobalWafers reported that two of their facilities were forced to close for a month. While the bullish forecasts for the current quarter are encouraging, many believe this to be the result of inventory building in the face of the pandemic. As for the second half outlook, we were left with no actual forecasts, rather a strong sense that it all depends on the extent to which COVID-19 is demonstrably under control or not by then.Separately,  there was an important milestone during the first quarter with China's National Semiconductor Industry Group (NSIG) launching its IPO on the Shenzhen STAR market. 

Silicon Wafers. The Impact Of Covid-19 In Q1 And Likely Outlook For CY 2020.

<ul class="">
<li>Sumco reported its 1Q20 results on Friday (08th May 2020) which saw both revenue and operating profit falling YoY by 12.1% and 41.4% respectively during the quarter.</li>
<li>However, the reported revenue was a touch higher than the company guidance as well as consensus estimates while operating profit beat both guidance and consensus by a significant margin.</li>
</ul>
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 50.0pt;">
JPY (bn)
</td>
<td style="width: 50.0pt;">
1Q2019
</td>
<td style="width: 50.0pt;">
1Q2020
</td>
<td style="width: 50.0pt;">
% YoY
</td>
<td style="width: 50.0pt;">
Guidance
</td>
<td style="width: 50.0pt;">
Actual vs Guidance
</td>
<td style="width: 50.0pt;">
Consensus
</td>
<td style="width: 50.0pt;">
Actual vs Consensus
</td>
</tr>
<tr>
<td style="width: 50.0pt;">
Revenue
</td>
<td style="width: 50.0pt;">
82.1
</td>
<td style="width: 50.0pt;">
72.2
</td>
<td style="width: 50.0pt;">
-12.1%
</td>
<td style="width: 50.0pt;">
71.0
</td>
<td style="width: 50.0pt;">
1.7%
</td>
<td style="width: 50.0pt;">
71.8
</td>
<td style="width: 50.0pt;">
0.6%
</td>
</tr>
<tr>
<td style="width: 50.0pt;">
Operating Profit
</td>
<td style="width: 50.0pt;">
19.8
</td>
<td style="width: 50.0pt;">
11.6
</td>
<td style="width: 50.0pt;">
-41.4%
</td>
<td style="width: 50.0pt;">
9.0
</td>
<td style="width: 50.0pt;">
28.9%
</td>
<td style="width: 50.0pt;">
9.5
</td>
<td style="width: 50.0pt;">
22.1%
</td>
</tr>
<tr>
<td style="width: 50.0pt;">
OPM
</td>
<td style="width: 50.0pt;">
24.1%
</td>
<td style="width: 50.0pt;">
16.1%
</td>
<td style="width: 50.0pt;">
 
</td>
<td style="width: 50.0pt;">
12.7%
</td>
<td style="width: 50.0pt;">
 
</td>
<td style="width: 50.0pt;">
13.2%
</td>
<td style="width: 50.0pt;">
 
</td>
</tr>
</tbody>
</table>
<div class="content-caption">Source: Company Disclosures, Cap IQ</div>
<ul>
<li>Despite revenue and OP declining on a YoY basis, both revenue and OP grew on a QoQ basis by 1.8% and 41.5% respectively, marking the first QoQ growth in earnings after seeing five consecutive quarters of earnings decline.</li>
</ul>


Sumco reported its 1Q20 results on Friday (08th May 2020) which saw both revenue and operating profit falling YoY by 12.1% and 41.4% respectively during the quarter.
However, the reported revenue was a touch higher than the company guidance as well as consensus estimates while operating profit beat both guidance and consensus by a significant margin.





JPY (bn)


1Q2019


1Q2020


% YoY


Guidance


Actual vs Guidance


Consensus


Actual vs Consensus




Revenue


82.1


72.2


-12.1%


71.0


1.7%


71.8


0.6%




Operating Profit


19.8


11.6


-41.4%


9.0


28.9%


9.5


22.1%




OPM


24.1%


16.1%


 


12.7%


 


13.2%


 




Source: Company Disclosures, Cap IQ

Despite revenue and OP declining on a YoY basis, both revenue and OP grew on a QoQ basis by 1.8% and 41.5% respectively, marking the first QoQ growth in earnings after seeing five consecutive quarters of earnings decline.


Sumco: Earnings Growth Resumes in 1Q20 Amidst Covid-19 Outbreak

Japan

SUMCO Corporation manufactures silicon wafers for the semiconductor industry. The Company produces silicon wafers used to produce solar batteries as well as ultra-high purity quartz used to produce vessels for silicon manufacturing process. SUMCO markets its products worldwide.

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SUMCO Corp (3436 JP)

Shin-Etsu: All Segments Seeing Declines; Earnings Rebound Could Take Longer

Shin-Etsu reported its 1QFY03/2021 results on Tuesday (28th July 2020) after market which saw both revenue and OP decline on a YoY basis. All the...

Shifara Samsudeen, ACMA, CGMA

🇯🇵 JAPAN • Stress Tests Part 5: Net Working Capital Outliers

THE CASH CONVERSION CYCLE - Net Working Capital is a measure of how efficiently a company manages its short-term assets and liabilities to...

Campbell Gunn

🇯🇵 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

Silicon Wafers. The Impact Of Covid-19 In Q1 And Likely Outlook For CY 2020.

With all of the major silicon wafer manufacturers now having reported Q1 earnings, it's clear that the impact of COVID-19 was relatively minor as...

William Keating

Sumco: Earnings Growth Resumes in 1Q20 Amidst Covid-19 Outbreak

Sumco reported its 1Q20 results on Friday (08th May 2020) which saw both revenue and operating profit falling YoY by 12.1% and 41.4% respectively...

Shifara Samsudeen, ACMA, CGMA

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