Equity Analyst, LightStream Research

Aqila Ali

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

<p><a href="https://www.smartkarma.com/entities/18703" target="_blank">Denso Corp (6902 JP)</a> failed to deliver as strong growth in revenue during its 3QFY03/19, compared to the first two-quarters of FY03/19. Denso reported a growth of only +1% YoY during 3QFY19, -1% below both consensus and our own estimate. Profitability of the company seemed more disappointing witnessing a decline of -17% YoY, falling below market expectations by -24%. The nine months ended cumulative figures for the company also looked depressing on the OP front, with Denso experiencing a -22% YoY decline, delivering an OPM of 6.1% (down from 8.1% during the same period last year).</p>
<p>However, Denso’s nine-month revenue looked relatively steady at 7.6% YoY growth. Denso has managed to make steady growth in revenue during the period despite the market slowdown in its key business regions, especially Europe and China. Revenue across all regions increased over the nine-months, supported by the overall increase in global car production and sales expansion from its recently consolidated subsidiaries (DENSO TEN and TD mobile). However, Denso’s OP over the current financial year has been on a downtrend citing its investments for future growth as the key reason. As we have previously mentioned, we consider this to be consistent with the company’s recent moves, having witnessed the company’s investment in companies such as Renesas, Metawave, Tohoku Pioneer, JOLED, ThinCI (<a href="https://www.smartkarma.com/insights/denso-prepares-for-the-future-investments-in-tohoku-pioneer-eg-following-joled-and-thinci" target="_blank">Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI</a>). The stock moved down 5% from pre-release to post-release low.</p>

Denso Corp (6902 JP) failed to deliver as strong growth in revenue during its 3QFY03/19, compared to the first two-quarters of FY03/19. Denso reported a growth of only +1% YoY during 3QFY19, -1% below both consensus and our own estimate. Profitability of the company seemed more disappointing witnessing a decline of -17% YoY, falling below market expectations by -24%. The nine months ended cumulative figures for the company also looked depressing on the OP front, with Denso experiencing a -22% YoY decline, delivering an OPM of 6.1% (down from 8.1% during the same period last year).
However, Denso’s nine-month revenue looked relatively steady at 7.6% YoY growth. Denso has managed to make steady growth in revenue during the period despite the market slowdown in its key business regions, especially Europe and China. Revenue across all regions increased over the nine-months, supported by the overall increase in global car production and sales expansion from its recently consolidated subsidiaries (DENSO TEN and TD mobile). However, Denso’s OP over the current financial year has been on a downtrend citing its investments for future growth as the key reason. As we have previously mentioned, we consider this to be consistent with the company’s recent moves, having witnessed the company’s investment in companies such as Renesas, Metawave, Tohoku Pioneer, JOLED, ThinCI (Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI). The stock moved down 5% from pre-release to post-release low.

Denso Revises Earnings Guidance Downwards After a 22% YoY Decline in OP as of 3QFY03/19

Asia Long-Short PM/Analyst

Curtis Lehnert

Event-Driven

<p>In my original insight on December 11, 2018 <a href="https://www.smartkarma.com/insights/trade-idea-toyota-industries-6201-jp-stub-riding-the-automation-wave" target="_blank" data-smartkarma-citation="insights:26653">TRADE IDEA - Toyota Industries (6201 JP) Stub: Riding the Automation Wave</a> , I proposed setting up a stub trade to isolate the market leading materials handling and automotive components business of <a href="https://www.smartkarma.com/entities/4500" target="_blank" data-smartkarma-citation="entities:4500:1">Toyota Industries (6201 JP)</a> that was trading at an unwarranted 35% discount to NAV . During the 56 calendar days that followed, <a href="https://www.smartkarma.com/entities/4500" target="_blank" data-smartkarma-citation="entities:4500:1">Toyota Industries (6201 JP)</a> has gained an underwhelming 4% and the trade has made 1.96% on the gross notional. This hasn't exactly been a trade to tell the grand-kids about, more or less a flat result but in this insight I will outline why I think the trade is over.</p>
<p>In this insight I will discuss:</p>
<ul class="">
<li>Performance of <strong>ALL </strong>my recommended stub trades</li>
<li>a post-mortem trade analysis on the Toyota Industries stub</li>
<li>alternative data support for my actions</li>
</ul>

In my original insight on December 11, 2018 TRADE IDEA - Toyota Industries (6201 JP) Stub: Riding the Automation Wave , I proposed setting up a stub trade to isolate the market leading materials handling and automotive components business of Toyota Industries (6201 JP) that was trading at an unwarranted 35% discount to NAV . During the 56 calendar days that followed, Toyota Industries (6201 JP) has gained an underwhelming 4% and the trade has made 1.96% on the gross notional. This hasn't exactly been a trade to tell the grand-kids about, more or less a flat result but in this insight I will outline why I think the trade is over.
In this insight I will discuss:

Performance of ALL my recommended stub trades
a post-mortem trade analysis on the Toyota Industries stub
alternative data support for my actions


TRADE IDEA - Toyota Industries (6201 JP): Close the Stub Trade

<p>Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/250/original/Capture11.PNG?1547155034" class="editor-image img-responsive" data-smartkarma-image-id="75250"></figure>
<div class="content-caption">Source: Internet - Chosungah Beauty</div>
<p>Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing. </p>
<p>The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value. </p>
<p>In this insight I will detail:</p>
<ul>
<li>an actionable market-neutral trade idea</li>
<li>an analysis of the various business units of Amorepacific</li>
<li>reasons for the under-performance of Amorepacific parent and a sign of a rebound</li>
<li>a recap of ALL my stub trade ideas on Smartkarma, including track record of performance</li>
</ul>

Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.

Source: Internet - Chosungah Beauty
Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing. 
The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value. 
In this insight I will detail:

an actionable market-neutral trade idea
an analysis of the various business units of Amorepacific
reasons for the under-performance of Amorepacific parent and a sign of a rebound
a recap of ALL my stub trade ideas on Smartkarma, including track record of performance


TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity

'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

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/363/original/2019-01-11_14-16-49.png?1547292773" class="editor-image img-responsive" data-smartkarma-image-id="75363"></figure>
<p></p>
Source: Japan Analytics</div>
<p style="text-align: left;"><strong>CURRENCY DRIVER</strong> - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including <a href="https://www.smartkarma.com/profiles/381" target="_blank" data-smartkarma-citation="accounts:381">Thomas Schroeder </a> <a href="https://www.smartkarma.com/insights/dollar-yen-big-short-phase-ii" target="_blank" data-smartkarma-citation="insights:27163">here</a> on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/287/original/2019-01-11_14-44-07.png?1547185462" class="editor-image img-responsive" data-smartkarma-image-id="75287"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>¥ &lt; 100</strong> - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/313/original/2019-01-12_10-50-14.png?1547257825" class="editor-image img-responsive" data-smartkarma-image-id="75313"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>EARNINGS DRIVER</strong> - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/319/original/2019-01-12_13-40-19.png?1547268030" class="editor-image img-responsive" data-smartkarma-image-id="75319"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>CURRENCY CORRELATIONS</strong> - In the <strong>DETAIL</strong> below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, <a href="https://www.smartkarma.com/entities/73" target="_blank" data-smartkarma-citation="entities:73:1">Toyota Motor (7203 JP)</a>.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/318/original/2019-01-12_13-15-40.png?1547266553" class="editor-image img-responsive" data-smartkarma-image-id="75318"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<p><strong>THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT </strong>- We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.</p>




Source: Japan Analytics
CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder  here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen 'peaks' highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  

Source: Japan Analytics
¥ &lt; 100 - If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan 'bulls' should welcome the coming US dollar bear market. 

Source: Japan Analytics
EARNINGS DRIVER - The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? 

Source: Japan Analytics
CURRENCY CORRELATIONS - In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).

Source: Japan Analytics
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT - We also go one step further and use the 'Foreign Currency Translation Adjustment' that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company's global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders' Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.

Japan: What to Buy & Sell if the ¥ Rises to 90

<p>In my original insight on October 17, 2018 <a href="https://www.smartkarma.com/insights/trade-idea-jardine-cycle-carriage-jcnc-sp-stub" target="_blank" data-smartkarma-citation="insights:24780">TRADE IDEA - Jardine Cycle &amp; Carriage (JCNC SP) Stub</a> , I proposed setting up a stub trade to profit from volatility in the markets that caused the <a href="https://www.smartkarma.com/entities/347" target="_blank" data-smartkarma-citation="entities:347:1">Jardine Cycle &amp; Carriage (JCNC SP)</a> stub to trade at a historically low discount to NAV. During the 78 calendar days that followed, <a href="https://www.smartkarma.com/entities/347" target="_blank" data-smartkarma-citation="entities:347:1">Jardine Cycle &amp; Carriage (JCNC SP)</a> has gained 23% and the trade has made 5.03% on the gross notional. I now recommend closing the trade.</p><p>In this insight I will discuss:</p><ul>
<li>Performance of <strong>ALL </strong>my recommended stub trades</li>
<li>a post-mortem trade analysis on the JCNC stub</li>
</ul>

In my original insight on October 17, 2018 TRADE IDEA - Jardine Cycle &amp; Carriage (JCNC SP) Stub , I proposed setting up a stub trade to profit from volatility in the markets that caused the Jardine Cycle &amp; Carriage (JCNC SP) stub to trade at a historically low discount to NAV. During the 78 calendar days that followed, Jardine Cycle &amp; Carriage (JCNC SP) has gained 23% and the trade has made 5.03% on the gross notional. I now recommend closing the trade.In this insight I will discuss:
Performance of ALL my recommended stub trades
a post-mortem trade analysis on the JCNC stub


Jardine C&C (JCNC SP): Close the Stub Trade

Japan

TOYOTA INDUSTRIES CORPORATION, a member of the Toyota Motor Group, assembles motor vehicles and manufactures automotive parts such as engines and air conditioner compressors.  The Company also produces industrial equipment and textile machinery as well as electronic devices such as computer modems and power inverters.

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Toyota Industries (6201 JP)

Denso Revises Earnings Guidance Downwards After a 22% YoY Decline in OP as of 3QFY03/19

Denso Corp (6902 JP) failed to deliver as strong growth in revenue during its 3QFY03/19, compared to the first two-quarters of FY03/19. Denso...

Aqila Ali

TRADE IDEA - Toyota Industries (6201 JP): Close the Stub Trade

In my original insight on December 11, 2018 TRADE IDEA - Toyota Industries (6201 JP) Stub: Riding the Automation Wave , I proposed setting up a...

Curtis Lehnert

TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity

Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and...

Curtis Lehnert

Japan: What to Buy & Sell if the ¥ Rises to 90

CURRENCY DRIVER - The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX...

Campbell Gunn

Jardine C&C (JCNC SP): Close the Stub Trade

In my original insight on October 17, 2018 TRADE IDEA - Jardine Cycle & Carriage (JCNC SP) Stub , I proposed setting up a stub trade to profit...

Curtis Lehnert

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