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.

Equity Capital Markets

<p>In February, the Nikkei reported that Kioxia Holdings, the former Toshiba Memory Corporation, was aiming to go public by October to raise funds for capex. The valuation touted was ¥3.5trn, a very nice uplift from the ¥2trn which Bain paid to take the company off of Toshiba’s hands in Jun 2018. We already considered the ¥2trn valuation in 2018 to be extremely full and given developments since then, see no fundamental reason to revise that view. So is this ¥3.5trn figure realistic? We discuss this below.</p>

In February, the Nikkei reported that Kioxia Holdings, the former Toshiba Memory Corporation, was aiming to go public by October to raise funds for capex. The valuation touted was ¥3.5trn, a very nice uplift from the ¥2trn which Bain paid to take the company off of Toshiba’s hands in Jun 2018. We already considered the ¥2trn valuation in 2018 to be extremely full and given developments since then, see no fundamental reason to revise that view. So is this ¥3.5trn figure realistic? We discuss this below.

Toshiba – A ¥3.5trn Kioxia Valuation Looks Like a Stretch

'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

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/137/336/original/2020-06-01_04-45-24.png?1590954343" class="editor-image img-responsive" data-smartkarma-image-id="137336"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>TWO-THIRDS AND AVERAGE</strong>- By Friday's close, the TOPIX Index had recovered 64% of its decline from the pre-COVID-19 peak of which one-third occurred in the last seven trading days. The balance of listed Japan has improved to a similar degree, but the percentages are more significant in both directions. Both values are now at their five-year average level.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/137/337/original/2020-05-31_14-12-45.png?1590954638" class="editor-image img-responsive" data-smartkarma-image-id="137337"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>FAR FROM AVERAGE</strong> - With only <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a> left to report amongst the 'mega-caps', aggregate trailing-twelve-month (TTM) earnings of listed non-REITs are at five-year 'lows'. Net-Income-based TTM and forward multiples are above 20 times for the first time since 2015. With only 58% of listed companies making forecasts for the current year, forward multiples are less reliable than usual. However, assuming that two months of annual revenue has been 'lost' and fixed costs are held static, trailing Net Income could decline to ¥20 trillion by December. At the current market cap, the earnings multiple would reach an Abe era high of 31 times.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/137/351/original/2020-05-31_13-04-13.png?1590965311" class="editor-image img-responsive" data-smartkarma-image-id="137351"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/137/352/original/2020-05-31_13-02-30.png?1590965373" class="editor-image img-responsive" data-smartkarma-image-id="137352"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div><p><strong>VTR &amp; DOWN VOLUME</strong> - Friday saw a two-month peak in the Value Traded Ratio and the highest Down Volume day since the COVID-19 low.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/137/354/original/2020-05-31_13-05-10.png?1590965443" class="editor-image img-responsive" data-smartkarma-image-id="137354"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/137/355/original/2020-05-31_13-04-48.png?1590965454" class="editor-image img-responsive" data-smartkarma-image-id="137355"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/137/356/original/2020-05-31_13-13-24.png?1590965643" class="editor-image img-responsive" data-smartkarma-image-id="137356"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>TORAKU, RSI &amp; McCLELLAN SUMMATION</strong> - Both these short-term indicators are at the top of their historic range, while the longer-term McClellan Summation has reached pre-COVID-19 levels. All of these indicators are flagging caution.</p>

Source • Japan AnalyticsTWO-THIRDS AND AVERAGE- By Friday's close, the TOPIX Index had recovered 64% of its decline from the pre-COVID-19 peak of which one-third occurred in the last seven trading days. The balance of listed Japan has improved to a similar degree, but the percentages are more significant in both directions. Both values are now at their five-year average level.Source • Japan AnalyticsFAR FROM AVERAGE - With only Toshiba (6502 JP) left to report amongst the 'mega-caps', aggregate trailing-twelve-month (TTM) earnings of listed non-REITs are at five-year 'lows'. Net-Income-based TTM and forward multiples are above 20 times for the first time since 2015. With only 58% of listed companies making forecasts for the current year, forward multiples are less reliable than usual. However, assuming that two months of annual revenue has been 'lost' and fixed costs are held static, trailing Net Income could decline to ¥20 trillion by December. At the current market cap, the earnings multiple would reach an Abe era high of 31 times.Source • Japan AnalyticsVTR &amp; DOWN VOLUME - Friday saw a two-month peak in the Value Traded Ratio and the highest Down Volume day since the COVID-19 low.Source • Japan AnalyticsTORAKU, RSI &amp; McCLELLAN SUMMATION - Both these short-term indicators are at the top of their historic range, while the longer-term McClellan Summation has reached pre-COVID-19 levels. All of these indicators are flagging caution.

🇯🇵 JAPAN MARKET UPDATE 1st June - Far From Average

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/136/651/original/2020-05-29_06-37-52.png?1590701909" class="editor-image img-responsive" data-smartkarma-image-id="136651"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>LIMPING HOME</strong> - 42 companies reported results on Thursday of which 32 were for the full-year. Of these, 38% made FY2021 forecasts of which only three scored positively. Seventy more companies will announce today, including <a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a>, <a href="https://www.smartkarma.com/entities/olympus-corp" target="_blank" data-smartkarma-citation="entities:356:1" rel="noopener">Olympus Corp (7733 JP)</a>, and <a href="https://www.smartkarma.com/entities/yamaha-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:7411:1" rel="noopener">Yamaha Motor (7272 JP)</a>, leaving only <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba (6502 JP)</a> from the 'trillion yen club' for next week. </p>

Source • Japan AnalyticsLIMPING HOME - 42 companies reported results on Thursday of which 32 were for the full-year. Of these, 38% made FY2021 forecasts of which only three scored positively. Seventy more companies will announce today, including Hitachi Ltd (6501 JP), Olympus Corp (7733 JP), and Yamaha Motor (7272 JP), leaving only Toshiba (6502 JP) from the 'trillion yen club' for next week. 

🇯🇵 JAPAN • Results & Revisions 28th May - Nissan, Nikon & Toray

Japan

Toshiba Corporation manufactures and markets electrical and electronic products. The Company's products include digital products such as PCs and televisions, NAND flash memories, and system LSIs (large-scale integrated), as well as social infrastructures such as power generators, medical equipment, and home appliances.

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Toshiba Corp (6502 JP)

Toshiba – A ¥3.5trn Kioxia Valuation Looks Like a Stretch

In February, the Nikkei reported that Kioxia Holdings, the former Toshiba Memory Corporation, was aiming to go public by October to raise funds for...

Mio Kato

🇯🇵 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

🇯🇵 JAPAN MARKET UPDATE 1st June - Far From Average

TWO-THIRDS AND AVERAGE- By Friday's close, the TOPIX Index had recovered 64% of its decline from the pre-COVID-19 peak of which one-third occurred...

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions 28th May - Nissan, Nikon & Toray

LIMPING HOME - 42 companies reported results on Thursday of which 32 were for the full-year. Of these, 38% made FY2021 forecasts of which only...

Campbell Gunn

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